MonotaRO based out of Osaka, Japan, is an e-commerce company that sells indirect materials for factories, construction work, and automotive-related businesses. The indirect materials, often referred to as Maintenance, Repair, and Operation (MRO) procurement are characterized by diverse product types. Despite their lower individual prices, the diverse range and volume make it difficult for the buyers to source them at convenience. This makes MonotaRO’s role crucial in helping navigate customers find the desired product through its extensive product list. Geographically, in addition to Japan, the company has expanded its operations to South Korea, Indonesia, and India.

Expansion of customer base on back of increased marketing efforts        

The Japanese economy remained volatile over the last few years due to the depreciation of the Yen, leading to a rise in raw material prices. Geopolitical factors including the war between Russia and Ukraine made the situation more challenging, and further aggravated by a slowdown in other key markets. Amidst the muted economic environment, MonotaRO focused on the acquisition of new customers through increased marketing efforts, including paid listings and internet search engine optimization (SEO). Additionally, the company has also enhanced customer experience by improvising its drop-off delivery services including extension of delivery cut-off time and targeting scheduled delivery.   

The culmination of the sales efforts resulted in the formation of 779,932 newly registered accounts in 9MFY24, bringing the total number of registered accounts to 9,886,453. Additionally, the product lineup reached approximately 23.7mn items in total with 591,000 items in stock available for the same day shipment.  

Looking ahead, the company intends to concentrate on the enterprise sector and postpaid corporate clients within its South Korean division, which presents significant growth opportunities. MonotaRO also expects to boost sales by acquiring high-lifetime value customers in both its Indian and South Korean subsidiaries. For FY24, management has projected a YoY increase in sales and operating profit by 12.7% and 14.4%, reaching JPY286.6bn and JPY35.8bn, respectively. These sales figures could potentially surpass the guidance, considering the company has already reported a 13% growth over 9MFY24, along with an 18% increase in October and a 14% rise in November.

Consistent increase in dividends and payout ratio backed by robust growth in sales  

MonotaRO registered positive financial performance over the years FY17-23, growing sales at an impressive 19.2% CAGR to JPY254bn. Selling, general and administrative (SG&A) expense as a percentage of net sales hovered in the range of 15.3-16.9% over the same period, with the management expecting it to reach around 15% in the medium term. The company’s balance sheet profile also appears to be healthy with a substantial increase in cash reserves, growing from JPY8.7bn in FY17 end to JPY18.6bn in FY23 end. The strong cash position provides spending comfort to MonotaRO for its promotional activities and marketing initiatives. The cash reserves also provide an opportunity to look at opportunistic transactions in favorable markets.

Backed by strong fundamentals, the company has adopted a progressive dividend policy, increasing its dividend at a CAGR of 19.5% to JPY16 per share over the period of FY17-23. MonotaRO further declared a FY24 interim dividend of JPY9 per share and plans to pay JPY10 per share at the end of the fiscal year, bringing the total dividend to JPY19 for the entire year. The payout ratio has also grown in sync with dividends, depicting a steady rise from 32.3% in FY17 to 36.4% in FY23.

Strong results drove stock price to all time high      

Tracking the positive 9MFY24 results, the stock price increased over 7% on November 1, 2024, and further went to register lifetime high of JPY2,840 on December 12, 2024. The stock has given returns of over 93% in the last 1 year and YTD returns stood at c.85%. Significant increase in price has led to expensive valuations compared to its peers. The company is currently trading at a P/E multiple of 53x (based on estimated FY24 EPS of JPY52.2), higher than the global peer average of 34.2x. However, on the bright side, the valuation appears to be reasonable when compared to the historical 10-year average of 62.7x. A total of 9 analysts have covered the stock with an average target price of JPY2,161, however, the recent surge in prices indicate that the target has been crossed, providing no room for upside. Any correction in near future could make the company’s valuation reasonable, providing investors scope to revisit the stock.

Overall, the company’s aggressive sales strategy to acquire new customers through different marketing and promotion activities should bode well in the long run. In addition, increased sales of MRO products to large customers should aid growth. Since the company has operations outside Japan, it has adopted its business as per local stock requirements and integrated convenient payment systems. This focus and onus on delivering customer-specific requirements should complement MonotaRO’s efforts to drive growth and sales from its overseas operations. However, presence in diverse geographic locations makes the company prone to geopolitical risks and local economic stress including muted demand or high inflation concerns. Moreover, MonotaRO’s business model is highly margin dependent, and any cost pressures related to SG&A expense could impact the profitability.