REL: 0840 HRS Rakon Limited
FORECAST: RAK: Rakon JV with Centum & FY08 Earnings Guidance
Rakon to enter Joint Venture Relationship with Centum
Rakon Limited (Rakon) has entered into a Joint Venture (JV) with Indian owned
and based Centum Electronics Limited (Centum) to manufacture selected Rakon
products alongside Centum's existing Frequency Control Products (FCP) in
The JV has the Bombay Stock Exchange listed Centum holding a 51% share and
Rakon a 49% share.
The new company will combine Centum's existing design and manufacturing
capability for frequency control products with some of Rakon's OCXO design
and manufacturing expertise, which were developed and are currently
undertaken in France.
Rakon and Centum have entered into agreements which protect the intellectual
property rights of both parties, provide Rakon with exclusive rights to sell
outside of India all products manufactured by the JV, and Centum with similar
exclusive rights within India. The arrangement will provide Rakon with
enhanced margins and earnings in the OCXO product range.
When the JV is fully operational in late 2008, and using current year
earnings as a base, Rakon's annual EBITDA is expected to improve by more than
NZ$3 million. This is as a result of the improved cost structure and
contribution from the former Centum business. After transaction costs Rakon
will also book a one off gain on the transaction of approximately NZ$1
million, reflecting the realisation of the gain over book value of assets
transferred to the JV.
"Moving some of our manufacturing capacity to India is consistent with the
constant evolution of our international manufacturing model and our objective
of having a highly competitive, world leading, cost base." said Brent
Robinson, Rakon Managing Director.
"We have a seven year working relationship with Centum through the outsourced
manufacturing of our VCXO product range. This gives us considerable
confidence that the JV will provide both Rakon and Centum with the
opportunity for substantial revenue growth."
"The formation of the JV with Rakon is in line with our strategic thinking of
ensuring that our customers always receive technologically advanced products
at competitive pricing" said Apparao Mallavarapu, Centum Managing Director.
"The combination of technology and market access of Rakon, and Centum's
ability to design and manufacture high quality products at competitive
pricing will make the JV a formidable force. We are confident that this
partnership will enhance the value of both Rakon and Centum".
The transfer of equipment and manufacture of products will begin in late
March and be completed over a six month period to ensure that there is no
interruption to Rakon's customers.
Mr. Robinson said the Joint Venture would provide Rakon with more readily
scalable global OCXO production in order to meet existing and future customer
demand. He also added that he expected the Joint Venture to allow Rakon to
eliminate reliance on temporary staff which were employed in France to meet
the sudden increase in demand soon after Rakon acquired the business in March
"Rakon's remaining manufacturing capability within France will continue to be
an integral part of our manufacturing model. As this JV becomes operational
the French team will be able to apply more focus on the things they do
exceptionally well," he said.
"In particular, OCXO product design, SC cut crystal and high specification
OCXO manufacturing will continue in France. Our French manufacturing
facility is also an approved supplier of electronic components under the
European Space Agency and Rakon is committed to maintaining this
Mr. Robinson added, "This initiative is complimentary with the manufacturing
options being explored in China. We have a team working full time on that
project and they are currently considering two alternatives that would enable
manufacturing to commence in China within the next 18 months."
Rakon also provided an update on its forecast results for the year ending 31
Update on 2008 guidance
Mr. Robinson said, "Our core GPS business will have grown in volume by 50%,
underpinning global revenue growth of over 65% for the full year (measured in
NZ$). Our updated guidance on the full year result is for revenue of $175
million and EBITDA of $23 million - $24 million, exclusive of the one off
gain from the Indian JV transaction. This assumes the NZ$/US$ will remain at
its current elevated levels of just under 80c for the remainder of the
"On the back of the sales growth we have been experiencing we believe we
should, and can, achieve better than this. EBITDA of $23 to $24 million
represents only a 13% EBITDA to sales ratio, and with sales having risen over
65% this year we feel we are not yet extracting sufficient profit from that
growth," said Mr. Robinson. "With the initiatives we have underway we would
expect to be able to return to last year's level of at least 18% EBITDA to
sales ratio within the next 24 months."
"The major differences between this forecast and the one given at the Annual
Meeting of $27 to $32 million can be largely put down to the continued
strength of the NZ dollar, higher than warranted expenses from our European
operations and extra expenditure on our global marketing and sales capability
to capitalise on last years FCP acquisition. There were also a small number
of sales that we forecast to occur in the early part of this calendar year
that we now believe won't occur until later in the year. These are largely in
the mobile phone and telecommunications infrastructure markets."
"The European expenses are now under control and the creation of this JV in
India will have major impact upon improving profitability from the European
"For our NZ based GPS business our year on year growth has again been
significant. As I have said, we expect full year sales volume to be about 50%
higher than the previous year and we continue to maintain our market share in
the still rapidly growing personal navigation device market."
Mr. Robinson said that Rakon's customers continued to forecast strong growth
for the coming calendar year despite the impact of financial market turmoil
and its expected impact on consumer demand.
"Whilst we are cautious on the impact of the credit situation on our
business, our customers that are exposed to consumer demand are affirming
strong forecasts for the next 12 months. We also have a number of
infrastructure related opportunities which we expect to generate income over
the coming 12 months; these have come about as a result of the FCP
acquisition last year, and as a result of this we have increased the
proportion of our business that is not directly exposed to consumer demand."
"With this Indian JV plus other plans that we have for the medium term, and
even with the NZ dollar remaining within its current range, we are confident
that Fiscal 2009 should produce a result appreciably better than we expect
for Fiscal 2008."
Centum is a leading design and manufacturing company producing hi-tech
electronic modules, subsystems and frequency control products. Centum
employs 350 staff and was recently recognized as one of the 500 most valuable
companies in India Centum is the industry leader in India, selling its
products into domestic and global space, defense, telecom, industrial and
automotive markets. Founded in 1993, Centum is listed on the Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE).
Rakon is a world leader in the development of frequency control solutions for
a wide range of applications. Rakon has leading market positions in the
supply of crystal oscillators to the GPS, telecommunications network
timing/synchronization and aerospace markets.
Founded in 1967 by Warren Robinson, in the 1990's Rakon became, and remains,
the leading supplier of GPS TCXOs to the world market.
Rakon has a diverse frequency control product portfolio, ranging from low
stability XO and crystal products through to rubidium equivalent frequency.
A teleconference to discuss Rakon's JV with Centum and Rakon's 2008 Guidance
will be held at 3.30pm NZ Time on Thursday 14 February 2008. Dial in
details, the confirmation code and a web link for supplemental material that
will be referred to during the presentation are listed below. A copy of the
supplemental material will also be available on the Rakon website one hour
before the teleconference.
Dial In Numbers
New Zealand: 0800 450 585
Australia: 1800 554 798
Hong Kong: 800 901 587
UK: 0808 234 8407
France: 0800 917 625
USA: 1866 839 8029
India: 000 800 100 6486
China: 10800 2640 090
Taiwan: 00801 615 166
Confirmation code: 7633079
Supplemental Presentation Material
Web link: http://www.rakon.co.nz/investor/presentation/
End CA:00160457 For:RAK Type:FORECAST Time:2008-02-14:08:40:55