Rakon blames high NZ dollar for first-half loss; shares hit low

Tuesday 15th November 2011 37 Comments

Crystal timing devices manufacturer Rakon is blaming the high New Zealand dollar for its $3.5 million bottom line first-half loss.

The result compares with a $5.9 million profit for the same six months ended Sept. 30 a year earlier. Rakon shares fell 8.96 percent to 61 cents when trading opened on the NZX this morning, below their previous low of 62 cents.

Before taking currency translation differences and other hedging into account, the net loss was $259,000, down from a net profit of $5.6 million in the previous first half.

Managing director Brent Robinson said significant underlying business growth was hurt by the currency's strength. While revenue in US dollars rose 14%, in New Zealand dollars it was flat at $94.6 million and earnings before interest, depreciation and tax (EBITDA) fell 55% to $6.2 million.

The growth in US dollar sales reflected “increased sales for smart wireless devices such as smart phones and tablet PCs and increased sales into high reliability applications for space and defence industries,” Robinson said.

But these gains were undermined by the New Zealand dollar averaging 81 US cents through the latest six months, 10 cents higher than in the previous first half.

“The prolonged strength of the New Zealand dollar is a problem not only for Rakon but for all New Zealand exporters and manufacturers,” he said.

Robinson said the economic environment is challenging but he reaffirmed previous guidance that full-year EBITDA will be between $14 million and $18 million.

“The global economic environment is seeing our telecommunications customers, in particular, reduce recent and current demand below prior rates and forecasts as they reduce inventory levels,” he said.

“We have and will continue to tune our business to respond. We have recently reduced indirect costs in a number of areas in a manner that we do not consider will impact on our ability to achieve our long-term goals.”

Japan's earthquake's impact on the overall supply chain and the European economic uncertainty negatively impacted earnings.

However, the proliferation of smart wireless devices, which is expected to grow, is putting substantial pressure on telecommunications network capacity which is expected to increase demand for Rakon's products.

The August 2010 acquisition of the Temex business led to increased sales to the space and defence industries. “This is a sector where we expect to continue to realise steady, sustainable and profitable growth,” Robinson said.

The acquisition had been targeted to increase Rakon's French business's product range and the aggregate French business reached breakeven in the first half, he said.

Rakon shares reached their previous record low at 62 cents in the depths of the global financial crisis in March 2009. They have fallen from $1.29 in January.

BusinessDesk.co.nz

Comments from our readers

On 15 November 2011 at 11:06 am Ray said:

This excuse is starting to wear very thin. I would have thought after a couple of years of a high dollar the management would have been able to cover this exposure.

On 15 November 2011 at 12:44 pm paul said:

when are we going to get some good independent board members...this family hand holding is also wearing thin. Hundreds of other export companies cover currency..are these guys not up to it?

On 15 November 2011 at 6:02 pm Don said:

Where is an effective hedging policy, other companies eg AirNZ & Infratil can do it, why not Rakon? They need more independent directors.

On 15 November 2011 at 7:03 pm Evan said:

Maybe cut back on the exorbitant family salaries for CEO 800k and Sales Manager 700k for a little kiwi company that can't make a profit. As a shareholder with big losses why not halve them and make the rest performance related on growing some shareholder value. Sick of hearing excuses!

On 15 November 2011 at 7:24 pm Bernie Fuller said:

I feel there is a lack of understanding within Rakon on what can be done to protect the Company from movements in exchange rates. Perhaps someone in the company should look at the measures taken by other companies e.g. Comvita that relies on its export markets for its profitability. Rakon will not survive as a New Zealand company unless it can re-think its operations.

On 16 November 2011 at 8:02 am firedog said:

Backing new zealand companies has surely cost this pensioner! F&P Appiances, Pike and this cosy little mafia! I am so sick of the same whining about exchange rates! Take a bit less from the Robinson trough and give a few crumbs to your investers please.....

On 16 November 2011 at 10:14 am Ross said:

I Hope the Directors have heard what the investors have to say now.... and take remedial steps before its too late. I thought I'd support Kiwi Ingenuity but then that too has a limit if one feels one is taken for a ride

On 18 November 2011 at 10:59 pm Mike said:

Seems like they like to keep their company negatively geared, by paying themselves big salaries. "Screw Shareholders" is probably one of their internal missions.

On 19 November 2011 at 12:43 am Mike said:

I remember Brent compared Rakon with Mainfrieght because "Rakon had a mission". It's obvious that they cannot execute it. I think Feltex would be a better analog.

On 21 November 2011 at 12:47 pm Gerald said:

Patience Gentlemen, in five years time you'll look back at $0.61c a share and be saying to yourselves "crikey they were cheap back then, I should have bought more...". But the name won't be Rakon anymore because they'll be bought out by a global tech player long before 5 years is up. If you want interest then put your money in a bank. I'd rather tuff it out with these guys for a couple more years.

On 22 November 2011 at 12:18 pm paul said:

gerald we are now 59 cents ....down another 3%....could have got that in the bank...why would you want to tuff this out with these guys when they are not interested in their shareholders...just themselves

On 22 November 2011 at 9:42 pm Gerald said:

58c - and they may drift lower still. On the other hand they may recover tomorrow, or next week and you've lost nothing at all. The point is what will they be this time next year - or more realisticly in 5 years time ? 58c ?, 1 dollar ? or $3.50 ? (now the bank doesn't look so hot)- Don't forget to get your 3% you would have handed your money over for a year, after inflation at 3% and tax you've gone backwards. Lets see where these are in a year's time. The question is who's selling at 58c - and why ?. If these are your last source of funds then ok, but unless you need the cash then just forget about the daily wobbles of an irrational market.I say just let the team get on with the job and time should work in everyone's favour. The Management own a fair chunk of the business too and are surely just as uncomfortable as the rest of us. FPA's in the same boat.

On 23 November 2011 at 10:52 am Simon said:

I am buying...anyone silly enough to sell at this price deserves to lose money. These are cheap.

On 23 November 2011 at 11:07 am paul said:

Gerald why would you want to contiue backing failed management. The result wasnt about exchange. They didnt tell what the real problem was or is but my belief is it was not all about exchange...if it was the dollar has dropped 5 cents since then and what has happened...continued falling SP...that says to me people have more concerns about management...when you ask them the question they dont reply...says it all to me

On 23 November 2011 at 12:45 pm paul said:

Gerald now 57 cents and the dollar is down again.

On 23 November 2011 at 1:00 pm Gerald said:

Paul, the share price is all about perception not reality. Clearly you have lost confidence, and this investment (assuming you are a shareholder) is not for you. Exiting is a decision only you and others can make based on circumstances. As you will gather - I'm clearly of Simon's thinking. If you can - just pretend the sharemarket will be closed for the next two years and then come back for another look, it will be different for sure.

On 23 November 2011 at 1:14 pm paul said:

my problem is nothing will be different in two years time...management needs to address their problem..which is themselves, and are they going to do that ?

On 23 November 2011 at 5:12 pm Mike said:

Gerald, if you buy stocks because you think they are cheap, then you are a fool. Good companies with expensive stock and good management will continue to grow shareholder value. Cheap stocks with poor management will continue to lose value. If you want some cheap stocks, try ALF. I would like to see Rakon track their market share. They keep pedaling out how the industry they are in is growing, but we get no stats on whether they are growing or losing market share. If they are losing market share, then the industry growth stats are meaningless, and management heads should roll (sales manager first). Also, for an innovative company they don’t seem to be too interested in patents. I hope they are patenting their innovations, or they are wasting R&D time and money. Getting awards is nice, but patents are added value to the company. There are plenty of services that can provide these management services. Unfortunately, management problems start and finish with the CEO. This CEO seems to be an under performer, and being a family business not much hope for change. As mentioned above, management with salaries linked to performance have skin in the game, and tend to perform better. But we don’t see Rakon management making much sacrifice when their company continues to under perform (maybe they should be paid in USDs). I wonder how many pacific holidays shareholders paid for last year?

On 23 November 2011 at 11:11 pm Gerald said:

Responses to Paul & Mike: Paul - the share price..57c..54c..30c whatever it is today, tomorrow or next pancake tuesday - if you don't SELL today you haven't LOST today. Same for tomorrow, friday or next week. What part of this seems unclear ?...and actually you're not selling either I suspect so all you're losing is sleep presumably. Stop looking at the share price every 5 minutes, you can't push it back up with with pot-shots. Mike:- Skin in the game ?- well with around 30% retained ownership I think the senior management have PLENTY of skin in the game (and alot more than many) -every reason to work hard for improvement common sense would suggest. Comparisons with Feltex or AFL are way off beam chaps. This company is making and selling necessary and useful products to a tech-hungry world, not peddling clapped out factories as state of the art or (inexplicably) buying a whole pile of sub-prime investments when your usual line is selling feed troughs and irrigation systems. BTW the 'cheap stocks' comment wasn't from me. That's my lot gents.

On 24 November 2011 at 9:18 am paul said:

you can have the best product in the world and sell as many as you can but if you arent making money or have smart management quick enough to move before the curve then the case is hopeless...in our case I feel the management part isnt quick enough or smart enough...although smart enough to be paid a lot more than performance shows....and the dollar is still falling and still no reponse in the SP

On 24 November 2011 at 10:42 am Mike said:

Gerald, 30% holding obviously isn't enough for this management. They are more concerned about their salary, which is way over the top. They want to take a leaf out of Steve Jobs book, who paid himself a salary of $1 (...hope Brent doesn't start trying to compare himself to Steve!) Poor management often have ego problems, and need to high salary to support it. I think dad needs to take his boys aside and give them a good talking too, if noone else at the company will. Some arogant and empty statements from Brent: - Rakon is committed to this years revised forcasts. Fact: Rakon has consistently missed forcasts. - Rakon has no plans for raising funds from the market. Fact: Balance sheet has gone from a cash surplus of $1mln to a debt of $26mln in about 6 months. The numbers indicate a different path. - Rakons sales are not impacted by downturns. People are switching to smartphones in good times and bad times. Fact: Rakon has noted a softing of orders due to the ecomonic downtime. I hope Rakon is "tuning" their business to handle the hugh downward revision of their sales forcast, or they are going to blow an even bigger hole in their balance at the end of this FY.

On 24 November 2011 at 10:59 am paul said:

Mike you are correct...please email Brent and any other board member you can find, your comments...or even Dad...someone needs to bring these guys under control....how many times has this happened before...Dad hands over the company to son and son destroys the business ...high salaries and plenty of holidays...Dad make the hard decision for all shareholders...and soon

On 24 November 2011 at 4:09 pm Brett said:

Mike how much do you know about Rakon and its industry? How do you know there are management issues? When “Dad” handed the business over to Brent in the mid 80s its revenue was ~1M and decreasing. Under Brent’s leadership and I’m sure with the help of a management team with proven success, it’s done nothing but grow to nearly ~200M today, all while competing and stealing market share from Japanese giants many times their size. I truly believe there aren’t any other management teams or people in NZ that have achieved what Rakon reflects. Given the global economic conditions, the company has performed very well and achieved allot over the past 6 years. Based on the facts one can only assume the company is continuing in line with its past.

On 24 November 2011 at 4:17 pm Brett said:

On 24 November 2011 at 5:21 pm Mike said:

Brett, this sounds like Rakon rhetoric, and there in lays the problem. They view themselves as the greatest management team in NZ. However, may be they should take a look at how the market rates them. Many analysts have an “Avoid” rating on the company.

On 24 November 2011 at 7:06 pm paul said:

getting the company to a certain stage is fine...taking the next step is where it looks like these guys are stalling...these big companies you say they have stolen business from are probably sitting there waiting for the time to pick up the pieces..surely management can see they havent performed ...admitting it is another story...every broker you speak to has had a guts full of the same old spin...currency

On 25 November 2011 at 10:21 am Brett said:

Mike, Paul it may sound like Rakon rhetoric but you can’t ignore what they say, it makes sense. other than misaligning forecasts which I agree has damaged investor perceptions, the company has achieved every milestone they originally promised and more. I can see how there is frustration for people that brought in at the $4.00+ mark, back when all the same brokers and analysts that are now slaging the company were saying buy buy buy. Obviously before the recession RAK shares were inflated somewhat and those that couldn’t see it and lost $ are bitter. As you say admitting it is another story. Why not point the finger. If you look at the bigger picture the brokers and analysis have to write about something, they know dam well Rakon is currently being hammered by the NZ$ and no one to this day has mentioned any specifics on how they could have hedged better than what they have done. The Rakon rhetoric may be getting old but not as old as analysis wiping egg of their face post slaging a company for a dip in the road.

On 25 November 2011 at 10:23 am Mike said:

Brett, with regard to Brent's "acheivements", maybe management could give Brent an award, make it nice and expensive (gold trophy or something), and put it on the company account. As for investors, this is how they view Rakon's (Brent) acheivements: Taken $200mln of investor's money to build a personal $200mln NPO empire to pay him and his cohorts big salaries.

On 25 November 2011 at 10:28 am Mike said:

BTW, in case you have not noticed, Rakon continuing in the way they have in the past 6 years is what most investors are worried about!

On 25 November 2011 at 10:47 am Mike said:

Brett, you can't be serious..."a dip in the road"!. The trajectory has been one way with a few "bumps" in the road.

On 25 November 2011 at 11:39 am Brett said:

It depends how you look at it, the company has a history of turning a loss into a profit, look at the performance of their acquisitions in France and UK, not to mention the global business has reported losses in the past and have managed to turn it around against all odds in less than one year. I haven’t seen Rakon use investors money irresponsibly, as you know it was used to support investments in off shore low cost manufacturing platforms, I don’t need to spell out the benefits that will be reaped as a result. If the business keeps growing the way it has and they continue focusing on driving down costs via their China and India facilities which in turn naturally hedges better rates against the US$, based on their past success I still believe it’s a winner and the profit will come, especially at less than S0.60!!! I haven’t seen any evidence of Brent been paid more than what any other CEO of a company that size gets or abusing the company account so can’t comment in regards to your concern. Im also not saying the company is spotless, nothing is, but I’m constantly impressed and more to the real problem NZ needs more companies like this so we can spread our risk across them all save us biting our nails after a poor HY result. For this stock we still need to be patient its undesirable but seems to be the way, if your after quick buck try the TAB

On 25 November 2011 at 12:22 pm Mike said:

Brett, its the long term investors that are hurting most with Rakon, and you're asking them for more patient! The TAB is probably looking pretty good for most of them now.

On 28 November 2011 at 1:47 pm paul said:

brett not hard to find what CEOs get paid for companies this size ....but then its not this size that counts its the money they make...so lets pay him on what the company makes in the way of profit...get him hungry ...bit like our country..give him the fishing line etc etc...buyers @54 cents...what a joke

On 28 November 2011 at 3:12 pm Brett said:

The guy seems pretty hungry to me, I know we can find out what CEO’s are on, I highly doubt he’s been over paid. So your saying CEOs wages should jump up and down yearly according to financial results? Isn’t that what bonuses are for? I see a world class company like Rakon obviously run by a highly skilled and hard working team. Good on them for making a difference and helping the NZ economy get a piece of the action. I think it’s a shame how people go straight for the CEO’s throat with absolutely no credible evidence. It’s the NZ government you should be attacking for not taxing NZ$ currency traders, I totally agree the SP is a real shame for investors, $.54 got to be a good price to bring down your average if you’re in it for the long haul and got the berries.

On 28 November 2011 at 5:32 pm paul said:

alway blame others...isnt he suppose to be the leader of the company...he has all the tools he requires to protect his company from currency traders...does he not have the berries.

On 29 November 2011 at 12:31 pm Brett said:

Hence id say why he’s moved a large chunk of the shop over to China, NZ’s loss, decisions like that require berries right across the board. Do you understand that if 90% of your revenue is in USD you can only hedge so much? Please explain more about these ‘tools’ beyond what they have already done that Rakon and other exporters fixed to the USD can use to overcome reality. As investors risking losing $, our attitudes should surly be to put pressure on the government to minimize the effects the NZ$ is having on our export sector / export investor confidence before we demand our CEO’s pull rabbets out of hats, take pay cuts and bring in newbie’s.

On 7 August 2012 at 4:19 pm Al said:

Why are all these posted comments so old. Has everyone given up on Rakon. I know I'm getting tired of waiting for a turn around on the share price and retirement isn't too far over the horizon.