Rakon: A star is reborn

By Anthony Doesburg

Could the planets be realigning for former sharemarket darling Rakon? Anthony Doesburg reports.

Brent Robinson is excited about the future and the opening of a factory in China. Photo / Steven McNicholl
Brent Robinson is excited about the future and the opening of a factory in China. Photo / Steven McNicholl

In business, as in politics, sometimes it is unhelpful to be labelled "the next big thing".

Not only is there the suspicion of your peers to deal with, but there is also the possibility that the road ahead might prove bumpier than expected.

For a while there, Peter Maire's satellite navigation company Navman appeared to be the brightest star among a cluster of fledgling technology companies that were going to bring New Zealand unprecedented wealth. Then it was Rakon, the maker of a key component for the telecommunications, GPS, defence and aeronautics industries.

On the first day Rakon floated on the stock exchange, in May 2006, its shares leapt by more than a third. But since then, it has been the proverbial rollercoaster ride.

From an initial face value of $1.60, the company's shares shot above $5 in less than a year. By February 2009, they had plunged to just 70c. They are currently trading at just under $1.

Access to public funds has brought greater scrutiny - the routine poring over the financial tea leaves by analysts, and the attentions of the media. A Herald investigation shortly after the company listed, for instance, focused on Rakon's supply of components for smart-bomb guidance systems, and caused a furore.

But if the company's managing director, Brent Robinson, resents the ridiculously high hopes for his company's future, he doesn't show it. And he professes to not finding the scrutiny of financial analysts too onerous.

"I wouldn't say they're breathing down our neck. It takes up time, so you have to allocate time to it. But it hasn't been a tremendous burden on us. Obviously there's much more governance involved for a public company than a private one but I was well-schooled in what to expect."

The business was founded by Robinson's father Warren more than 40 years ago and between them, family members still own about a quarter of its shares.

Robinson, whose stake is less than half his father's 13 per cent, says he has never thought of selling any of his shares.

"The whole world was going through extraordinary times when it peaked at $5-something. I was looking at it and thinking, was that the real value? But then it came down and I looked at that and wondered whether that was the real value as well.

"I try not to get too emotional about it. I feel for some of the shareholders that bought and sold and lost money over it but I have a long-term view. I'm sure the share price will reflect the value longer term compared to where it is now."

However he concedes that being labelled a sharemarket darling was not very helpful.

"I think people get a little bit carried away sometimes, hence the price got up over $5. And what goes up has to come down which is what happened during the global financial crisis, with tech stocks getting hammered globally."

There have been no dividends to console shareholders who've ridden the rollercoaster but Robinson says the intention is to pay them at some point.

"The company has a lot of growth ahead of it so we're hoping dividends are not too far away. But there's still a lot of opportunity for this company to grow."

Rakon's most patient investors are certainly hoping that's the case. And as far as Robinson is concerned, there is plenty of cause for optimism.

In the year to the end of March, the company made an after-tax profit of $8.5 million, compared with a loss the previous year of $5.4 million. Sales were up by nearly a third to $189 million.

With the financial turnaround has come a host of awards. In May, Rakon was named the Hi-Tech Trust's company of the year - and the decade - and last month it received top honours at the Air New Zealand Cargo Export Awards. Its British subsidiary also collected the top business prize at an event in Lincolnshire where it has a plant.

To cap off the spell of positive company news, on Monday Rakon and Chinese joint venture partner Timemaker will open a US$45 million ($54 million) factory in Chengdu, capital of Sichuan province in southwest China, that will halve the production cost of the frequency control devices made at the company's Mt Wellington plant.

Interviewed on the eve of joining a John Key-led trade mission to India, Robinson was basking in the glow of the award wins and bullish about the company's China prospects. Next stop on his itinerary would be China for the factory opening.

"I thought Fisher & Paykel Healthcare would take it out actually," he says, of the company-of-the-decade accolade received at the Hi-Tech Awards in Wellington, for which Orion Health, Endace and Datacom were also contenders.

The judges called Rakon "gutsy and innovative" and a company with truly international appeal.

Although flattered to be singled out in such company, Robinson is even more pleased to have received the export awards.

"I've always dreamed of being a leading New Zealand exporter. I really believe we need to export, so it's pretty good to win that."

Rakon can make a fair claim to being a leading exporter. It was ranked among the top 10 New Zealand "globally focused" technology businesses in the 2010 Technology Investment Network (TIN100) report - a list led by Fisher & Paykel's appliances and health businesses, and IT services company Datacom.

It can also call itself a global company, Robinson says, on the strength of its R&D and manufacturing facilities in Britain and France, joint ventures in India and China, and the fact that about half its staff of 800 are based overseas.

Overseas is where the money is. About half Rakon's revenue comes from Asia (mainly China), with the rest split pretty evenly between North America and Europe. In the main, customers in the telecommunications and navigation device markets are buying time-compensated crystal oscillators (TCXOs), the bulk of which are made in Mt Wellington.

Its export history goes back to the 1970s. Warren Robinson began making channel crystals for radios after an earlier venture into manufacturing marine radios.

"He was always struggling to get crystals in time to satisfy his customers," his son says. "They would have to wait months to get their radio once they'd bought it. He saw the opportunity to make crystals for the local market."

It wasn't long before Robinson senior was chasing export sales as well. His first overseas move was to establish a Singapore business which sold crystals in Asia.

But advances in radio design meant the channel crystal market "was heading south". About this time - the late 1970s - Brent joined the company, his father urging him to see what potential there was for newly developed TCXOs.

"The channel crystal party was over and we needed something new. Dad had started looking at TCXOs and when I came along he handed me a bag of parts and said this could be the way of the future."

So it proved. An early customer was NEC, which at the time was making cellphones in Australia. But a change to CER rules led NEC to adopt a new supplier, forcing Rakon to look elsewhere for business.

"The GPS market was just starting. They hadn't put all the satellites up yet; it was a new thing. We thought positioning anywhere on the globe from a little electronic box - this has to be going places. So we were like a dog with a bone with that."

The GPS opening coincided with Robinson's younger brother Darren, today Rakon's marketing director, signing on at the family firm.

With the demise of the channel crystal market, the Singapore business was wound up and Rakon opened an office in Taiwan, to be near GPS makers Magellan and Garmin.

Through a deal with United States GPS chip-maker Rockwell Semiconductor, it became the biggest supplier of crystal oscillators to the personal navigation device (PND) market. It was gratifying, Robinson says, to make introductions that helped Peter Maire get New Zealand PND maker Navman off the ground.

More than a decade on, the PND market is in decline and Rakon is having to find replacement business.

It is capitalising on sales of smartphones and tablets, forecast by Goldman Sachs to double this year to more than 400 million. And as the "smart wireless devices" are connected to the internet, leading to what Robinson says will be a 50-times increase in data traffic over five years, Rakon is gearing up for Long Term Evolution (LTE) 4G cellular network business.

"The biggest opportunity we're facing is the infrastructure build-out that needs to happen along with smart wireless devices. We see LTE as a massive opportunity.

"There'll be more phones, home automation - many different devices. LTE requires up to eight times more base stations or cells to cope with data demand. There will be large cell towers but lots of small cells. We see ourselves as being very competitive in the small cells market."

With the help of a $7 million Government development grant, which it qualified for by investing more than 5 per cent of revenue in R&D - it spends 6 to 7 per cent, Robinson says - the company is adapting photo-lithographic computer chip manufacturing processes to the production of crystal wafers for base stations.

"Traditionally we've mechanically made our crystals, which means we've used saws to cut them up and lapping machines to grind them down and shape them. With this new technology we're developing we'll be able to take larger wafers, print a pattern on them that is developed photographically and etch the crystals to shape and size."

Photo-lithography is a challenging three-dimensional process for making crystals. Rakon's efforts, using adapted second-hand equipment from chip-maker Texas Instruments and a new "clean room", are expected to bear fruit in the form of very high frequency oscillators within a year.

"The first ones will be going into telecommunications equipment but longer-term it's probable they could go into handsets as well."

The Government R&D hand-up is one thing, but the 2006 sharemarket listing is what cemented Rakon's global company status.

"I think it's been very positive for the company. It's enabled us to grow faster than we would have under our own steam," says Robinson. "We've managed to globalise the company. It would have been very difficult to do it unless we'd done the IPO. We couldn't just stay niche in GPS - we needed to diversify the business into other areas such as telecommunications and aerospace."

In all, three share issues have raised about $140 million. Of that, around US$37 million was used for the 2007 acquisition of Britain-based C-MAC; some was put into the creation of Indian and Chinese joint ventures in 2008; and €400,000 was spent on last year's buy-out of French company Temex.

The Chengdu factory opening - a joint venture with Chinese partner George Ye, who "rocked up" to Rakon about eight years ago and convinced Robinson he could make wafers of the high quality the company demanded - is a major milestone.

In attendance will be New Zealand trade officials, local Communist Party bigwigs and representatives of important new customers such as telecommunications equipment makers Huawei and Alcatel-Lucent.

"We're moving into China - there's a lot of opportunity there. It's a big deal to be opening the Chengdu factory."

Goldman Sachs telecoms and manufacturing analyst Tristan Joll notes that the company's strongest market, GPS-based personal navigation devices, or PNDs, is expected to shrink this year by about 10 per cent. However, that loss should be balanced by increased sales of GPS-equipped smartphones, which are predicted to grow by 50 per cent over the same period.

Rakon expects smart wireless devices, including tablets, to account for about a quarter of its sales this financial year, up from about 15 per cent last year.

"The challenge it faces," Joll says, "is that as with all high-volume integrated components there's quite a rapid commoditisation curve, so the prices they can fetch come down quite a lot year-on-year.

"A second and even more acute issue is that it has a lot of manufacturing and overhead costs in New Zealand dollars when the majority of the revenue for that business is US dollar-denominated."

But help is at hand with the opening of the factory in China.

"I think what the factory in Chengdu does is allow it to offset pressures on both fronts so it can make the things for less and hopefully create a more natural hedge against currency exposure."

In a March research note, Joll said he expected the company to start seeing tangible manufacturing benefits from Chengdu in the second half of next year.

The 20,000sq m plant, which is about four times the size of Rakon's New Zealand operation, will initially make crystal oscillators for smartphones.

Cheaper Chinese labour will keep production costs to about half the New Zealand level.

The factory is a joint venture between Rakon Chengdu Crystal (RCC) and Timemaker, in which Rakon has a 40 per cent stake, and will employ 150 people.

Herald columnist and fund manager Brian Gaynor has drawn attention to the absence of any overseas directors on the exporter's board, but Robinson insists the directors have sufficient international experience.

Chairman Bryan Mogridge and director Bruce Irvine are directors of Mainfreight, another business that is expanding globally, he notes. He and his father also have plenty of overseas experience, starting with the establishment of a subsidiary in Singapore in the 1970s, he says.

"It's not as if we haven't been working globally for a long time ... We also have input from our global executives; our global partners."

Joll is largely positive about Rakon's prospects and, in a commentary on its May results, which were marginally below expectations, called the stock a "buy".

"The underlying performance of the business is very good and the demand for the things it is making is great," Joll says. The difficulty will be how to turn a profit while the greenback is so weak.

Forsyth Barr's Jeremy Simpson is a little more reserved. The company's earnings are difficult to predict, he says. It has a history of not meeting earnings expectations and of share price volatility. It is also very exposed to the strong kiwi.

During an 18-month period when the local market "hasn't actually done a lot" Rakon shares have been trading in a range from just below $1 to $1.20.

"At the same time it is growing faster than most of the stocks in our market," Simpson says. "People may well be sitting on the sidelines waiting to see how the business goes in getting some track record back in terms of delivering reliable numbers."

Forsyth Barr's recommendation is that the stock is an "accumulate" - a softer version of a "buy", Simpson says.

- NZ Herald

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