KEY POINTS:
Auckland-based high technology manufacturer Rakon has entered into a joint venture with Indian-owned and based Centum Electronics.
The deal will see selected Rakon products manufactured alongside Centum's existing frequency control products in Bangalore, India.
The Bombay Stock Exchange-listed Centum will have 51 per cent of the joint venture and Rakon 49 per cent.
Rakon, which makes high performance frequency control technology based on quartz crystals, said today the arrangement would provide it with enhanced margins and earnings in the OCXO product range.
When the joint venture was fully operational in late 2008, and using current year earnings as a base, Rakon's annual earnings before interest, tax, depreciation and amortisation was expected to improve by more than $3 million.
That was as a result of the improved cost structure and contribution from the former Centum business, Rakon said.
After transaction costs Rakon would also book a one off gain on the transaction of about $1m, reflecting the realisation of the gain over book value of assets transferred to the joint venture.
Rakon also provided an update on its forecast results for the year ending March 31.
The updated guidance on the full year result was for revenue of $175m and ebitda of $23m to $24m, exclusive of the one off gain from the Indian joint venture transaction, Rakon managing director Brent Robinson said.
That assumed the New Zealand dollar would remain at its current elevated levels against the US dollar of just under 80c for the remainder of the financial year.
The major differences between the latest forecast and previous guidance of $27m to $32m could be largely put down to the continued strength of the NZ dollar, higher than warranted expenses from Rakon's European operations and extra expenditure on global marketing and sales capability.
Mr Robinson said that by the end of March Rakon's core GPS business would have grown in volume by 50 per cent, underpinning global revenue growth of over 65 per cent for the full year, measured in New Zealand dollars.
"On the back of the sales growth we have been experiencing we believe we should, and can, achieve better than this," he said.
Ebitda of $23m to $24m represented only a 13 per cent ebitda to sales ratio.
With the initiatives now under way, Rakon would expect to be able to return to last year's level of at least an 18 per cent ebitda to sales ratio within the next 24 months.
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, Mr Robinson said.
With the Indian joint venture announced today, plus other plans the company had for the medium term, and even with the NZ dollar remaining within its current range, Rakon was confident that fiscal 2009 should produce a result appreciably better than that expected for fiscal 2008.
Mr Robinson said that moving some of Rakon's manufacturing capacity to India was consistent with the constant evolution of its international manufacturing model and its objective of having a highly competitive cost base.
The joint venture would provide Rakon with more readily scalable global OCXO production in order to meet existing and future customer demand.
He expected the joint venture to allow Rakon to eliminate reliance on temporary staff employed in France to meet the sudden increase in demand soon after Rakon acquired the business in March 2007.
As the joint venture became operational the French team would be able to apply more focus on the things they did well, Mr Robinson said.
The Indian initiative was 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's shares closed at $3.12 yesterday, the lowest value in the past year during which the high point was $5.80.
- NZPA
