Rakon listed in May 2006 at $1.60 per share. The company’s share price initially rallied to a high of $5.80 during May 2007 but had fallen to $1.15 by March 2010 when the company raised an additional $66.1 million. Since 2007, Rakon has issued a number of profit warnings, blaming a strong NZ dollar and now trades around 60 cents. But there is more to it than currency. Underlying mix shifts to lower margin products, weakening demand in Telecommunications markets, severe pricing pressure and ambitious acquisitions are just as much to blame for the poor performance.
The conclusion has to be that the underperformance and strategy of the company is the responsibility of the senior management and board and it is here the company is significantly lacking. Rakon is managed as a family company. Three of the six directors on the board are part of the Robinson family, with two of them being executive directors. The board needs more independent and non-executive directors. The company is notoriously bad at predicting its future and constantly disappoints investors with aggressive guidance that it fails to achieve. The company’s management credibility is rapidly disappearing as investors feel disappointed and misled. If it was simply a case of a surprisingly strong NZ dollar then deeper board and management expertise would have led to better currency management.
Rakons first half FY 2012 earnings release, for the six months to 30th September, was a continuation of what shareholders have come to expect, a low quality disappointing delivery. There was no revenue growth, a 54% fall in earnings before interest tax, depreciation and amortisation and a net loss after tax. In addition, the company is facing a softening in demand, has net debt of $28m and negative operating cash flow. The company has maintained guidance, despite better foreign exchange cover, implying an overall downgrade to expectations. It will be difficult for the guidance to be achieved in the current environment and looks increasingly likely Rakon will need to raise additional capital and restructure its operations in the future.
Should the current performance of the company management and board continue, it is unlikely Rakon will remain part of the NZ50 Index for much longer. It is time for Rakon to come clean, change management, refresh the board and rebased expectations. Only then may investor’s scepticism abate.
Mark Warminger