Rakon eyes US aerospace business, feels CO2 pressure

New Zealand tech company Rakon is in growth mode. The Auckland-based company turns quartz crystals into radio frequency control systems that help communications equipment, satellites, missile guidance systems and emergency beacons keep the same “heartbeat.”
Like any other electronic device they communicate with, they are eyeing aerospace opportunities in the United States, says chief executive officer Dr. Sinan Altug.

With the ongoing 5G mobile network upgrade and the global boom in data centers, telecommunications infrastructure is proving to be fertile ground for Rakon. Huge server farms need microsecond precision when hosting things like financial transaction data.

Altug said:

“For example, the space market. The largest space market is in the United States, so it makes a lot of sense for Rakon to do R&D and manufacturing in the United States.”

Altug is bullish on the opportunity amid the boom in low-earth orbit satellites upending the aerospace industry.

We all know about SpaceX’s Starlink and the hundreds of birds that Rocket Lab is sending into low earth orbit for various customers, Altug adds. We are looking to have our own private satellite constellation that can enhance our existing services. ”

Rakon already has a piece of the satellite business, and the acquisition will help accelerate that share.

But when Herald visited Rakon’s Oakland plant last week, Altug had more immediate and practical concerns. The CO2 crisis has halted testing of some of his Rakon products.

Since early 2022, when the Marsden Point refinery closed, it has had problems with its CO2 supply. The plant, which is being dismantled, produces carbon dioxide as a by-product of oil refining, and the closure has driven up prices.

Altug says his company is now paying three to four times more than it did a year ago.

Rakon is in the process of transitioning to using more liquid nitrogen for cooling. It is more costly than using CO2, but has the advantage of being environmentally friendly.

However, as with the food industry, hospitals and other sectors, Rakon said safety concerns prompted Todd Energy’s Kapuni liquid carbon dioxide plant, New Zealand’s only remaining local source of CO2, to shut down on December 20. Being closed has put us in a tight spot. We won’t be back at full capacity until the end of the year.

“The CO2 problem has been going on for us for about a year, and it came to mind just before Christmas,” says Altug.

“We use CO2 for testing purposes, i.e. to bring the product down to freezing temperatures, say minus 40 degrees Celsius.

“We have put a lot of effort into converting equipment that uses CO2 to liquid nitrogen. This is not an easy conversion and is not possible with all our equipment. To the extent that the team has just stopped testing several products due to the lack of

When Herald spoke with Altug on January 24, he was scheduled to meet with Rakon’s CO2 supplier, BOC, to continue discussions about priority supplies.

“We explained that some of the applications we offer, such as emergency locator beacons, are also life-saving applications,” says Altug.

What happened to that meeting? “We have had constructive discussions with BOC and are working together to manage the current supply shortage,” said a Rakon spokesperson.

Herald took a behind the scenes look at Rakon’s Auckland factory in Mount Wellington. The factory is being upgraded with more robotic equipment.

About 350 of the company’s 1,000 staff are in the country.

Most of the rest are in the French plant, which handles most of the large products made for aerospace and defense customers, and the Indian plant, which is in the process of moving staff to a new, much larger plant. We also have a semiconductor development team in the UK.

And given current events, Altug reiterates that his company has not received any income from the invasion of Ukraine. “In the first days of that conflict, we stopped supplying a few customers who were in Russia. They were all on the commercial side, not the defense side,” he said. We have a policy of not engaging in weapons or biological weapons.

In November, Rakon reported a 15% decline in net income to $16 million in the six months ended September 30, but maintained guidance for the full year.

The decline in earnings was driven by higher tax charges (unlike a year ago, the company was unable to use accumulated losses to offset its IRD bill), as well as operating losses related to higher inflation-fueled labor costs. A $4 million increase in costs, plus a long-term equity incentive to retain staff.

Rakon said full-year underlying earnings (ebitda) before interest, taxes, depreciation and amortization will be in the range of $38 million to $44 million. For fiscal 2022 he is below $54 million.

Revenue was $87.2 million, up 1%.

The breakdown shows the shape of Rakon’s business these days. This marks a multi-year restructuring that involves the company moving away from its roots of selling low-margin kits for mass-market consumer products (including the Apple iPhone) and focusing on higher margins. It follows construction. -Margins, more stable infrastructure and new markets.

Telecom revenue increased 14% to $47.5 million and space and defense business increased 19% to $12.3 million as 5G rollouts continued around the world. “Direction” revenue (GPS including emergency beacons) increased 16% to $16.4 million.

With this change, Rakon is on track to return to profitability in 2018 and achieve its most profitable fiscal year 2023.

In a research note issued after the company’s first-half figures, broker Forsyth Barr noted that the $28.1 million ebitda was “up significantly from expectations of $19.9 million,” although supported by a $7.4 million foreign exchange gain. surpassed,” he said.

ForBarr slashed its valuation from $2.00 to $1.86, but believed that a weaker global economy and inflation would delay earnings from low-Earth orbit satellites. However, it still represents a significant premium to Rakon’s recent trading price of $1.02.

So far, however, investors have shown limited enthusiasm for Rakon’s turnaround.

The company’s stock price soared to $2.20 last year in takeover talks, but fell again after it came to naught. The stock has hovered just above the $1 mark for most of this year, with a market capitalization of about $233 million.

Dividends, or more specifically, not showing dividends, is an annoyance.

Rakon’s annual conferences are always more colorful than others. At his AGM in 2016, the NZ Shareholders Association removed Darren Robinson, son of founder Warren Robinson, from the board. The association claimed that the Robinsons continued to run the company as a family business after taking the company public in 2008. Brent Robinson stepped down as chief executive last April and was replaced by Altug in an internal promotion, but remained on the board and worked in the office during the Herald’s visit. rice field.

At Rakon’s 2021 Annual Meeting, then-Chairman Bruce Irvine assured shareholders that the company would pay dividends if projected results for fiscal 2022 were met and there were no material capital requirements on the horizon.

The 2022 results were slightly above guidance, but no profit was paid to shareholders.

Instead, in May 2022, new Chairman Lorraine Witten announced a new dividend policy. This allows Lacon’s directors to decide whether to declare dividends at least annually based on, among other factors, the company’s current and projected performance. There was no interim dividend for the first half of 2023.

Mike Daniel, an activist shareholder who owns about 6% of Rakon, said in a letter to Witten just before Christmas that the company had about $14 million in excess working capital and inventory, with a net $40 million at a time. He said he had cash and was pushing for dividends. Time to move into the black in the second half. Mr Daniel said it was “outrageous” that no profits were paid to shareholders.

Altug’s comments to the Herald last week showed Daniel writing yet another angry letter to the chairman when Rakon released its full-year results (the company never paid a dividend). .

“Our shareholders, and potential shareholders, are very dividend-focused, so there was a lot of enthusiasm for that. [but] We are focused on growth, especially as the macro economy is very volatile. Having a war chest and not having to deviate from strategy is a big plus for the company. ”