Rakon to Enter Joint Venture Relationship with Centum
14 February 2008: 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 Bangalore, India.
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 2007.
“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 accreditation.”
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 March 2008.
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 financial year.”
“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 design source.”
“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 standards. In particular Rakon has excelled at taking niche, precision technology and creating commercially viable solutions for high volume markets.
Rakon is based in Auckland, New Zealand with principle manufacturing operations in New Zealand, the United Kingdom and France. Rakon also has sales offices throughout the world. For more information visit its web site at www.rakon.com.