Rakon: Worth +$1.40; Management should institute a dividend

2 may 2023

Rakon is a NZ based manufacturer of frequency control chips which enable data transmission, particularly for satellites and the communications industry as a whole. The company forecasts 40-43M of EBITDA for the FY23 and trades around 8x earnings. We think the company looks materially undervalued at 8x earnings, largely because the board has not declared a dividend – we think a declared dividend would act as a catalyst that sees the stock re-rate to ~$1.10-1.40 per share. The catalyst is the company instituting a dividend – this is something that shareholders have been advocating for since at least 2020. Mike Daniel who owns 5.7% of the company is strongly advocating for a dividend – a 20% dividend would amount to less than 4M of est.19.8M TPP – we agree with Daniel & other shareholders here – it seems questionable that a publicly traded company on the NZX is not offering a dividend when they are cash-positive with very little debt.

We think the stock is worth at least $1.40 based on peer multiples – obviously peer multiples have decreased as the global tech sector has been hit – Taiwan Semiconductor, for example, trades at 14x fwd earnings – on the same very reasonable multiple Rakon is worth ~$1.48. This factors in underlying EBITDA decreasing -10% and softening valuations of tech companies globally.