Still the cheapest tech manufacturer on the planet
This from Forsyth Barr leading NZ BrokerRakon Limited
StarsAlign
Rakon (RAK) is a New Zealand headquarteredtechnology company specialising in high-frequency control systems and timingsolutions. At the core of the product suite is the requirement for stable andhighly accurate timing and frequency references to successfully transfer dataand provide positioning information. Growing momentum in several potentially long-datedgrowth markets builds confidence in RAK's future.
Key structural growth drivers — Technology play in 5G,low-earth-orbit satellites and autonomous vehicles
The three critical drivers for RAK’s growth are the long-tailgrowth segments of 5G & data centre infrastructure, low-earth-orbitsatellite (LEO) networks, and autonomous vehicles. First, the global rollout of 5G network infrastructure and data centres is the key driver of growth. Second, from FY24 the new breed of low-earth-orbit (LEO) satellites, with highly demanding performance specifications, provide RAK with a second growth platform. Third, as autonomy in the automotive, agriculture, mining and aircraft segments progresses demand for RAK’s highest precision and accurate solutions should grow. RAK sits at the leading edge of these segments as it tilts away from the highly competitive, and lower margin, consumer products.
Stars align during FY22
The stars have aligned for RAK during FY22 as a beneficiary of thedisruptions in global supply chains. These disruptions have opened the door toseveral new customers, providing management the opportunity to create enduringrelationships, similar to that with its existing customers all while pushinghigher specification products. Additional one-off business has come on atmuch better margins, driving operational leverage and lifting earnings in FY22materially. However, RAK is not immune to potential supply issues withsignificant 4Q22 risks looming in sourcing key inputs. Core underlying marketgrowth should fill most of the gap in FY23 from the one-off deals inFY22.
Valuation
A Discounted Cash Flow (DCF) approach, supported by a comparablesanalysis, drives our NZ$2.26 per share spot valuation for RAK. Post thetemporary COVID-19 related earnings uplift in FY22, this equates to 13.8xEV/EBITDA on our underlying FY23 earnings estimate. Key to forecasting earningsover the next year is RAK’s ability to:
- Secure key components (especially in the 4Q22) to satisfy client orders
- Drive 5G revenue growth
- Add manufacturing capacity in India
- Gain market acceptance of its new LEO satellite applications
