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 just 38 cents on the 12th February this year. The following day the share price plunged another 31.6% to 26 cents. The reason for the sharp fall was another downgrade to FY13 EBITDA guidance (of c40%) and a note that the ‘balance sheet…will be subject of actions to ensure it is properly aligned to a future for Rakon’. We take this to mean Rakon may require another capital raising to support its debt position.
So what has caused this former market darling to fall so far? In terms of the current downgrade, Rakon put it down simply to ‘the Smart Wireless Device market’s sudden and aggressive price reductions demanded’. However, the recent action is the result of the erosion of Rakon’s competitive position over a number of years. Management and the board have been unable to deal with the rapid changes in their industry.
Rakon is a small supplier into a limited group of large technology manufacturers, who have ensured they are not beholden to a single producer for a particular component. The manufactures retain the power and can play one supplier off against another. Rakon’s products are now easily substitutable for those of another producer, whereas they had been differentiated in the past. To exacerbate the issue, Rakon has also invested heavily in new manufacturing facilities in China, resulting in a capital intensive business with no pricing power in a market that rapidly became commoditised. It is a perfect storm. Questions must be raised at the board level as to why this investment was sanctioned.
This business provides valuable lessons for investors. Firstly, ensure the product or service a company is producing has a point of difference and that it can influence pricing. Secondly, that it either has long term contracts for sales in place (with pricing) or a repetitive, distributed customer base. Finally, that the business uses capital efficiently and has a strong board that understands the market it operates in and can weigh the risks effectively. Over the last five years Rakon appears to have effectively failed on all counts.
Senior Investment Analyst