Getting saddled with the "market darling" label can be a tough cross to bear. It tends to accompany a rallying share price, lashings of media hype and high hopes on the part of investors, brokers and financial analysts. It also sets up a stock for an almighty fall if those great expectations are not met. Rakon — the maker of quartz crystal frequency control components used in telecommunications networks, space and defence systems — illustrates that point perfectly. The firm became the toast of the market after its shares listed on the NZX at $1.60 each in May 2006. They leapt by a third on their first day of trading and soared to a record close of $5.67 within a year, giving the business a market capitalisation north of $700 million. One article, published in May 2007 as the stock price approached its all-time high, went as far as saying the company's shares were "gleaming like the quartz crystals it produces". But Rakon's dream run wasn't to last. Along came the global financial crisis, which sapped demand for the high-end electronic devices its products went into. By February 2009 the stock had fallen to just 70c. A disastrous investment in a Chinese factory, which the company was forced to exit only two years after it opened in 2011, hasn't helped matters. Rakon had a market capitalisation of just $50.6 million when its shares opened at 26.5c yesterday. "That's the problem with being a market darling," says chief executive Brent Robinson, whose father Warren started the company in 1967 in his Howick garage. "The higher you go, the harder you fall." Rakon, he admits, fell pretty hard. "But I'm confident the market will see that Rakon has been around a long time and has been through cycles of, as you say, reinventing itself in new markets and doing well in them." WATCH: Robinson discusses Rakon's latest move In its latest bid for reinvention, the company has invested A$5.8 million ($6.4 million) in Aussie startup Thinxtra, which is rolling out an Internet of Things (IoT) network across Australia and New Zealand in partnership with French technology firm Sigfox. The "Internet of Things" refers to the network that connects the growing number and variety of devices which can share data via the internet. United States research firm Gartner has forecast the number of connected devices to reach 20.8 billion by 2020, up from 6.4 billion this year. An IoT network can, for example, connect smoke alarms to smartphones, to tell homeowners if the batteries are flat or, worse, their house is on fire. "All of these little things that haven't really been done before are now possible with the cloud," Robinson says. Rakon isn't alone in viewing IoT as a market worth getting into. In February, US IT giant Cisco Systems announced a US$1.4 billion acquisition of Jasper Technologies, a developer of software that allows businesses to manage connected devices. Robinson sees a wide range of applications for the technology, from street lighting — where it could advise the authorities that a bulb has blown — to manufacturing and agriculture. "Obviously in New Zealand we're world leaders in agriculture, stock management, tracking cows — their behaviour, temperature and when they're ready for breeding," he says. "All of this could be done with very low-power eartags that would relay back to the cloud." Thinxtra, in which Rakon now holds a 64 per cent stake, has installed base stations and antennae in Sydney and Melbourne. The network is expected to become available to 85 per cent of Australians and New Zealanders by the end of next year.
The higher you go, the harder you fall.
In addition to its Thinxtra investment, which it funded with existing debt facilities and cashflow, Rakon views IoT as a growing market for the components it manufactures. "Over the last few years we've been dealing with these networks both in the nodes and building out the network infrastructure, supplying the quartz crystals or oscillating frequency control timing devices, " Robinson says. Rakon, he points out, has been at the forefront of many technologies we now take for granted, such as GPS. "We were an enabling technology for that industry as it grew up from the early 1990s through to what it is today," Robinson says. "We were in the first GPS-enabled cellphone, from Motorola, right the way through into the Apple devices. That market got pretty tough for us, as everyone knows, and it's still a bloodbath today and we're comfortable we're not in it." "Bloodbath" is an apt description for Rakon's experience. The company invested heavily in China, raising $65 million from investors in 2009 to fund the expansion of manufacturing operations in that country. That included a joint venture factory in Chengdu, the capital of China's southwestern Sichuan province. Much fanfare heralded the facility's grand opening in July 2011.
A contingent of business media and equity analysts headed out to Rakon's Mt Wellington HQ, where the flag of the People's Republic was flying high. Following a lunch of spicy Sichuan dishes, management — who were in Chengdu for the official opening — gave a briefing via teleconference. By 2013, however, it was becoming evident that something was awry. Aggressive Japanese competitors had entered the fray and, buoyed by a major devaluation in the yen, were forcing large-scale reductions in the price of the components Rakon's Chinese factory had been set up to produce. Margins evaporated. What had once been a lucrative space for Rakon was quickly becoming commoditised. Robinson says Rakon may have been "a bit naive" to think it could secure a large slice of the smart wireless market, but he remains proud of the "leading edge operation" the firm set up in China. "It's quite unusual that component manufacturers as niche as us end up in a situation where they are selling [products] for a loss," he says. "Our competitors played it in a way that surprised myself and the board and still does. Large companies in that market are still losing their shirts but they have massive balance sheets and I guess one of them will be the winner in the long term." Extracting itself from China was painful, with a $33 million loss on the investment contributing to the $83.8 million net loss the company reported in the 2014 financial year. Shareholder discontent was evident at Rakon's annual meeting in September 2013. One elderly investor grabbed the microphone and told the board that the firm's lack of dividend payments had been "a disgrace".
[The Internet of Things] can really shift Rakon into a whole new area of business.
"You were a darling of the sharemarket — now you're a disaster," he said. Since shifting away from smart wireless devices, the firm has refocused on higher margin markets including telecommunications infrastructure, space and defence. It has also shifted manufacturing from Britain and France to New Zealand and India as part of restructuring that aims to lower operating costs. Rakon's moribund share price, however, suggests the company has some way to go in convincing the market that it is on the right track. The former NZX50 stock (it left the benchmark index in 2012) used to be well covered by sharebroker analysts, but is now firmly out in the wilderness in that respect. "The company is off the radar for a lot of investors just because it's had such a chequered history and such a fall from grace," says Craigs Investment Partners' head of private wealth research, Mark Lister. "I suspect the market will be reluctant to give Rakon any credit for initiatives in that [IoT] area until they see runs on the board." So how confident is Rakon that its latest investment won't go the same way as its Chinese foray? "I don't think the IoT market will be like that at all, " Robinson says. "It's much more fragmented, so I don't think it will commoditise in the same way." Rakon director and major shareholder Sir Peter Maire says IoT is the "perfect opportunity" for the firm's technology. "Not only is it a good investment, but it ties us in with Sigfox and ties us into a network operation and gets us close to end-user customers," the Navman founder says. "It can really shift Rakon into a whole new area of business."
Maire insists the Chinese investment, while a difficult experience, wasn't a complete disaster. "We sold the business to a Chinese company that is a partner still — we still have a small shareholding in it — and they build huge amounts of devices at a very low cost and are a supplier to Rakon," he says. "It was certainly a game we tried to play and it just got too hot." Maire, who owns 5.6 per cent of Rakon, says the company faces a big challenge in getting the market to accurately understand its business. "We're probably not very good at telling the story," he adds. Maire says the company, which has never paid a dividend in its 10-year history as a listed company, hasn't produced the returns investors are looking for. "We've been public for a long time now and we've just got to produce the bottom-line result to justify a better share price." Investors did have something to celebrate last year when Rakon posted its first annual net profit since 2011. The company was $3.2 million in the black in the year to March 31, compared with the horror $83.8 million loss a year earlier. But, as noted by Milford Asset Management's Brian Gaynor in a 2011 Business Herald column, Rakon has a reputation for making forecasts it can't achieve. Its most recent downgrade came in January, when Rakon said it expected to report underlying earnings before interest, tax, depreciation and amortisation (ebitda) of between $9 million and $10 million for the full financial year, down from a previous forecast of $15.4 million. The company attributed the guidance cut to lacklustre equipment spending by telecommunications network operators. Another market gripe has been the level of family involvement in Rakon's management and governance. Three of the firm's seven board seats are occupied by Robinsons — Brent, brother Darren and father Warren. The brothers are both executive directors. Close to a quarter of Rakon is owned by interests associated with the family. "The overall impression is that Rakon is a family company that is listed rather than a listed company with a family background," Gaynor said in his 2011 column. It's a charge Brent Robinson firmly rejects. "My brother Darren and I have worked side by side developing this company and we still believe that we know more about the industry than anyone else working for the company and still are a critical part of it," he says. "I think we all add something to the board, otherwise we'd change it." Looking ahead, Robinson says morale within the company is high, even if the share price remains stubbornly low. "I know everyone is confident that Rakon has still got great technology and is well positioned to capture growth in the future."