Rakon: up Looking
Tech company now sees opportunities in aerospace, writes
KBy far the largest space market is in the US — and it would make a lot of sense for Rakon to have a US R&D and manufacturing operation. Rakon chief executive Dr Sinan Altug (above)
iwi high-tech company Rakon is in growth mode. The Auckland-based firm, which turns quartz crystals into radio frequency control systems that help telecommunications gear, satellites, missile guidance systems and emergency beacons maintain the same “heartbeat” as other electronics they’re communicating with, is eyeing aerospace opportunities in the US, says chief executive Dr Sinan Altug.
Telecommunications infrastructure has proved fertile ground for Rakon, amid ongoing 5G mobile network upgrades and the global boom in data centres. The giant server farms need micro-second accuracy when they’re hosting the likes of financial transaction data.
“We are looking at potential acquisition opportunities that would allow us to have better market access elsewhere as well,” says Altug.
“For instance, the space market. And by far the largest space market is in the US — and it would make a lot of sense for Rakon to have a US R&D and manufacturing operation.”
Altug is bullish on the opportunities amid the boom in low-Earth orbit satellites, which is upending the aerospace industry.
We’re all aware of SpaceX’s Starlink, and the hundreds of birds that Rocket Lab is sending to lowEarth orbit for various customers, but Altug adds: “Some of the big tech companies — the likes of Amazon, Facebook and Google — are looking at having their own private satellite constellations that allow them to augment their existing services.”
Rakon already has a chunk of satellite business, and an acquisition would help it accelerate its share.
But when the Herald visited Rakon’s Auckland plant last week,
Altug had a more immediate and down-to-earth concern: the CO2 crisis, which has halted testing of some Rakon products.
There have been issues with the CO2 supply since early 2022, when the Marsden Point refinery was mothballed. Carbon dioxide was produced as a byproduct of oil refining at the plant, which is now midway through being dismantled, and its closure has pushed up prices.
Altug says his firm is now paying three to four times as much as it was a year ago.
Rakon is part-way through a transition to using more liquid nitrogen for cooling. It’s more expensive than using CO2, but does have the upside of being more environmentally friendly.
But like the food industry, hospitals and other sectors, Rakon was caught on the hop by the December 20 closure of New Zealand’s only remaining local source of CO2 — Todd Energy’s Kapuni liquid carbon dioxide plant in Taranaki — because of safety concerns. It won’t be back to full capacity until late this year.
“The CO2 issue has been going on for approximately a year for us, and it came to a head just before Christmas,” Altug says.
“We use CO2 for our testing purposes, namely to get products down to sub-zero temperatures, minus 40 degrees Celsius for instance.
“We have put in substantial effort to try to convert CO2-using equipment to liquid nitrogen. It’s not an easy conversion, and it’s not possible for all of our equipment, and right now we are in a shortage to the extent that just recently our team has stopped doing testing on a few products because we don’t have C02.” When the Herald talked to Altug on
January 24, he was due to meet Rakon’s C02 supplier, BOC, to continue discussions over priority supply.
“We’ve explained that some of the applications we serve, such as emergency locator beacons, are also lifesaving applications,” Altug says.
How did that meeting go? “We had a constructive discussion with BOC and are working with them to manage the current supply shortage,” says a Rakon spokesman.
The Herald had a look behind the scenes at Rakon’s Auckland plant in Mt Wellington, where more robotic gear is being installed with successive upgrades.
About 350 of the firm’s 1000 staff are in this country.
Most of the rest are at a plant in France, which handles most of the larger products manufactured for aerospace and defence clients, and in India, where staff are in the process of moving into a new, much larger factory. There’s also a semiconductor development team in the UK.
And, given current events, Altug reiterates that his firm is not making any revenue from the Ukraine invasion. “In the opening days of that conflict, we stopped supplying the few customers we had in Russia — who were all on the commercial side, not the defence side,” he says. Rakon also has a policy of no involvement in chemical or biological weapons.
In November, Rakon reported a 15 per cent fall in net profit to $16 million for the six months to September 30, but stuck by its full-year guidance.
The profit slip was blamed on higher tax expenses (unlike a year ago, the firm could not use accumulated losses to offset its IRD bill), plus a $4m increase in operating expenses tied to an inflation-fuelled rise in labour costs, plus long-term share incentives to retain staff.
Rakon said full-year underlying earnings before interest, tax, depreciation and amortisation (ebitda) would be in the range of $38m to $44m, a slight lift from the $34m-$44m guidance it gave in August, although both figures are below the 2022 financial year’s $54m.
Revenue was up 1 per cent to $87.2m.
A breakdown shows the shape of Rakon’s businesses these days, following a multi-year re-engineering that involved the firm moving away from its roots selling low-margin kit for mass-market consumer products (including Apple iPhones), to a focus on higher-margin, more stable infrastructure, and new markets.
Telecommunications revenue was up 14 per cent to $47.5m as 5G rollouts around the globe continued, while space and defence business increased 19 per cent to $12.3m. “Direction” revenue (GPS including emergency beacons) increased by 16 per cent to $16.4m.
The change resulted in Rakon returning to profit in 2018, and it’s on track to achieve its most profitable year for the 2023 financial year.
In a research note issued after the firm’s first-half numbers, broker Forsyth Barr noted that ebitda of $28.1m was “a significant uplift on expectations of $19.9m”, albeit aided by a $7.4m currency exchange gain.
ForBarr reduced its valuation from $2.00 to $1.86, however, citing a weaker global economy and inflation, which it believed would delay lowEarth orbit satellite revenue. But that still represents a big premium on Rakon’s recent trading price of $1.02.
So far, however, investors have displayed only limited enthusiasm for Rakon’s turnaround.
Its shares spiked to $2.20 last year on takeover talk, but sank back as that came to nothing. The stock has been hovering just over the $1 mark for most of this year, for a market capitalisation of about $233m.
The dividend — or, more pointedly, its failure to appear — has been a sore point.
Rakon’s annual meetings have always been more colourful than most. At its 2016 AGM, the NZ Shareholders’ Association ousted Darren Robinson, son of founder Warren Robinson, as a director. The association maintained that after listing the company in 2008, the Robinsons had continued to run it as a family business. The following year, Warren Robinson said he would not stand for reelection to the board — leaving his older son Brent as the family’s only representative.
Brent Robinson stood down as chief executive in April last year, replaced by Altug in an internal promotion, but remains on the board and was working in the office during the Herald’s visit.
At Rakon’s 2021 annual meeting, then-chairman Bruce Irvine assured shareholders that if the 2022 financial year forecast results were achieved, and if there were no significant capital requirements on the horizon, the company would pay a dividend.
While the 2022 financial year results came in just ahead of guidance, there was no profit payout to shareholders.
Instead, in May 2022, new chair Lorraine Witten announced a new dividend policy, under which Rakon’s directors would determine at least annually whether or not to declare a dividend based on the company’s current and expected operating results, among other factors. There was no interim dividend for the first half of the 2023 financial year.
Activist shareholder Mike Daniel, who owns about 6 per cent of Rakon, agitated strongly for a dividend in a letter to Witten shortly before Christmas, saying the firm had about $14m in excess working capital and inventories and net cash of $40m at a time when it was heading for a second-half profit. Daniel said it was “outrageous” there was no payout to shareholders.
Altug’s comments to the Herald last week indicate Daniel will be writing yet another angry letter to the chair when Rakon delivers its full-year result (the firm has never paid a dividend).
“Our shareholders, and potential shareholders, are very dividendfocused, so we have had a lot of heat for that [but] we’re focusing heavily on growth, especially with the macroeconomy so volatile. Having a war chest, and not having to divert from our strategy, is quite positive for the company.”