Fallen Angel or Rising Phoenix? The Jury's Still Out on Raccoon

For a U.S.-based analyst, even thinking about recommending a company like Raccoon (Mothers; 3031), a Japanese online B2B wholesale broker that went public in April 2006, is a little scary. Raccoon's stock price, after hitting 3,860,000 yen a few days after its IPO and listing on the TSE's Mothers section -- known for its "new economy" companies with sky-high PEs -- continued to decline to a low of 285,000 yen, almost a 93% drop. Along the way, the company, which had been profitable for two fiscal years prior to the IPO, incurred a midyear loss in October, and revised its forecasts downward to net losses for the years ending April 2007 and 2008. Is this deja-vu all over again, a replay of the bust in US Internet stocks, circa 1999?

Source: Yahoo Finance Japan

Or is it really not that bad? Perhaps at the current price of 400,000 yen the company deserves another look. While it incurred a net loss of 77 million yen for the 6 months ended October 2006, compared with 35 million yen in net income for the year-earlier period, gross revenues increased 60.5%, and gross profit was up 28.2%. The net loss included a revaluation for the write-off of deferred taxes of 57 million yen. Operating cash flow was positive at 29 million yen.

More important, the revised forecasts to negative territory for 2007 and 2008 are largely due to the company's shift in its medium-term strategy. Judging that there is a significant opportunity in bridging the B2B business for Japan's small- and medium-size firms -- a sector known for its complicated, fragmented, and inefficient supply chain -- Raccoon decided to (1) change its fee structure from payments upfront to a recurring fee model, and (2) invest heavily in advertising to attract a retail-store customer base. The changes in fee structure had an immediate, negative effect on the bottom line, since some existing customers departed and there was a drop in initial, one-time revenues when new merchants signed up. However, the company's belief that the new fees will bring in continuing monthly income seems to make sense (see the chart below by Investment Bridge, Raccoon's IR firm).









Green bar - revenue model with former fee structure
Orange bar - revenue model under new fee structure

Is the increased advertising bringing in new customers and merchants? The jury's still out, but customer/merchant acquisition data shows an increase in the customer base of around 4% per month since October, and as of the end of January it is up 37.3% since the end of last fiscal year in April 2006. The company doesn't release monthly revenues, but in the past they have been strongly correlated to the number of customers.

We're not ready to call Raccoon a buy until we find out the relationship between new advertising/customer acquisition costs and their impact on revenues. The PE based on last year's results is approximately 20, while the forward PE based on the company's April 2009 results would be approximately 15. We know that Japan's new exchanges, especially Mothers, are supposedly scary places, full of new, risky companies with lofty PEs. But at least compared to some of the U.S. bubble-economy companies that in 1999 had PEs of 500 based on EPS five years or so down the road, Raccoon does not look so frightening.

Note, however, that even with a positive turnaround, the stock price may take a while to react. The pool of available is limited - at a per-share price of 400,000 yen (about US$3,300), quotes are too high for most individual investors, while at a market cap of about US$30 million, the company would be too small for many institutions.