Rakon chases elusive component

TIM HUNTER: YOUR PORTFOLIO
Last updated 05:00 26/08/2012

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If you see a bloke dressed in combat fatigues skulking around some bushes in a seldom-visited location, there might be no cause for alarm. He is probably geocaching.

The idea is to use a GPS device to track down a hidden package, which may contain trinkets, clues to the location of other caches or simply a list of other people who found it before you.

As well as finding the way to your inner nerd, the geocaching game probably helped find a use for GPS handsets before the technology became ubiquitous in smartphones.

These days, however, global positioning systems are being installed in all but the most humble communications gadgets and New Zealand company Rakon is the market leader in GPS components called crystal oscillators.

With millions of smartphones being made every year and Rakon the self-proclaimed "expert in taking high-performance solutions and making them affordable for high-volume manufacturing", the company should be raking it in.

But it's not.

In the year to March, Rakon made a loss of $420,000, down from a profit of $8.5 million the previous year. Revenue fell from $189m to $178m.

Meanwhile, its shares have performed like a greased pig on a hydroslide, with gravity's inexorable momentum overwhelming the porker's frantic efforts to gain height.

Until, perhaps, last Monday, when Rakon announced a deeper relationship with big Chinese telco Huawei. The shares immediately leapt as much as 20 per cent off their floor around 42c, where they had been bumping along for a couple of months.

The deal involves "a quadrupling of Rakon's sales to Huawei over the next five years to US$56m".

This rather vague statement apparently means sales will total US$56m ($69m) over the next five years.

This is not to be sneezed at by any means. Huawei is a major supplier of smartphones, as well as a whole range of infrastructure kit, and gaining more of its business is a big thing.

Craigs Investment Partners analyst Dennis Lee said after the announcement: "We think it's positive," but "without enough information on the [profit] margin it's hard to tell. In this industry, margin is very important". Lee's last research note on the company, on May 17, rated Rakon a "hold" with the price at 49c.

Although Rakon's management was bullish about its ability to benefit from explosive growth in mobile data traffic, said Lee, "we are less upbeat due to the escalating macro uncertainties".

"That said, we believe RAK should recover from the disappointing FY12 driven by restocking and the benefits flowing from the commoditisation of smartphones. RAK's new and much lower-cost T-sensing crystals should allow RAK to ride the commoditisation cycle by gaining market share."

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The Huawei deal may be a sign of those benefits, even if it won't by itself produce a big lift in earnings. After attending a Rakon/Huawei post announcement function, Andrew Bascand of Harbour Asset Management, owner of about 9 per cent of Rakon, said the company's staff "were more upbeat than I have seen them for two years."

"This doesn't mean in my opinion any immediate lift in either sales or profit - but momentum will build through 2013," he said.

One of Rakon's problems is the exchange rate. Most of its business is denominated in US dollars, so the high kiwi/US rate has been a major headwind that looks likely to persist.

Another issue investors may consider is the substantial investment Rakon has made adding operations in China, Europe and India. According to its cashflow statements, in the last five years Rakon's investments total $189.5m. With cash from operations totalling just $33.6m over the same period, the company has been funding its expansion by selling shares and borrowing more money.

That pattern can't continue, so shareholders will want to see some harvest being reaped from those investments before too long. GPS has gone way beyond geeks in camouflage gear.

On Friday Rakon followed up the Huawei announcement with an "optimistic but cautious" update saying market conditions were below expectations and competition was keeping margins tight. Operating earnings this year would be $14-$16m, it said, slightly better than last but still way down on 2011's earnings of $24.8m.

The market's sensitivity to anything but good news showed in the share price, which dipped 6c to 41c.

It looks like investors won't be holding their breaths for a bonanza.

- Sunday Star Times

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