Rakon raising tipped if euro crisis worsens

Photo / Steven McNicholl

Technology manufacturer Rakon could be forced to shore up its balance sheet with a capital raising should the global economic environment continue to destabilise, a fund manager says.

The Mt Wellington company's interim result disappointed the market yesterday, with its shares slumping to an all-time low after the firm said the strong New Zealand dollar and reduced demand for some of its products had halved earnings.

Mark Warminger, a portfolio manager at Milford Asset Management, said Rakon's situation would become more precarious the longer the global economic instability went on.

The company, whose products are crucial components of telecommunications infrastructure and consumer goods such as smartphones, reported a net debt of $28.1 million yesterday.

"I think they're in a very poor position if we see a continued slowdown in Europe and in the telco sector," Warminger said.

But Rakon chief operating officer Graham Leaming said no such move was planned in the "near term".

The company was forecasting operating cash to "turn positive" during the second half of its current financial year, he added.

Rakon yesterday reported a 55 per cent fall in first-half earnings before interest, tax, depreciation and amortisation (ebitda) to $6.2 million, compared with the same period in its last financial year.

The NZX-listed oscillating crystal maker posted a net loss of $259,000 for the six months to September 30.

Warminger said Rakon's falling earnings were being caused by more than just the strong dollar and decreasing demand.

"I think there's just really poor management performance behind the company's disappointing results, to be honest."

Yesterday's result announcement saw the firm's shares - which were worth more than $5 in 2007 - plunge by more than 10 per cent to close at 60c last night, below the previous low of 63c they reached in early 2009.

Managing director Brent Robinson said demand in the telecommunications side of Rakon's business had been affected by the impact of this year's Japanese earthquake and tsunami on the supply chain, as well as by economic uncertainty in Europe.

But the situation was expected to improve as increasing demand for data - especially through the establishment of new 4G networks - drove telco providers to invest in increased capacity, he said.

Robinson said consumers were rapidly switching from traditional mobile phones to smartphones, meaning that part of the business was less affected by economic turbulence.

"[The switchover] will happen in poor times and in good times," he said, adding that production was ramping up at Rakon's newly opened lower-cost Chinese manufacturing plant, which would provide improved earnings for the business.

Robinson said full-year ebitda was still expected to be in the $14 million to $18 million range, which would be an up to 43 per cent reduction on last year's result.

Rakon said it had half of its exposure to the greenback hedged at US78c for the next 18 months, while 55 per cent of its exposure to the British pound was hedged at £1.58 over the same period.

The company said the kiwi had an average exchange rate of US81c during the first half of its current financial year - 10c higher than in the same period last year.