Rakon
Rakon represents an interesting case for Valuecruncher. It is hard to say where Rakon will position itself in its respective market in the next few years. From what can be taken from the 2007 interim report, it seems that at least in the short-term, Rakon will concentrate on it’s current product lines (in quartz crystal technologies with emphasis on GPS systems), rather than branch out into completely new products.
Valuecruncher values each Rakon share at $2.59 with a range between $1.85 and $3.44. The current share price stands at $3.66, outside of Valuecruncher’s valuation range.
Key Assumptions
Revenue Growth
Revenue growth for Rakon was 41.98% in the 04/05 period and 4.13% in the 05/06 period, which represented unusually low growth. From the figures presented in the 2007 interim report, it can be assumed that revenues for 2007 will be around $100 million, representing a growth rate of 40% in the 06/07 periods. We have also assumed revenue growth to be 30% in the 07/08 period and 20% in the 08/09 period, following the trend that revenue growth will remain high but continually decrease over the next few periods.
EBIT Margin
EBIT margins have grown steadily from 6.03% in 2004 to 11.61% in 2006. If we assume that Rakon will continue to concentrate on the development of their existing products, it is likely that EBIT margins will continue to rise. We have forecasted these to continue to grow to 15%, 20% and 25% in the next three years.
Terminal Growth
Terminal growth is expected to be 3%
Discount Rate (WACC)
The discount rate used in this analysis is 13%.
Commentary
It comes as no surprise that the value we have come up with is under the current share price. The assumptions we have put in place restrict Rakon to expand only in their current product lines. Since the release of Rakon onto the stock exchange there has been much hype about this stock, with most of it being justified by possible growths in the industry that the company belongs to. However, we have valued Rakon on its current core business. Perhaps the market is valuing Rakon with more growth opportunities than we are? Based on our valuation and the current market price, the value that the market places on these ‘extra’ growth opportunities is $114 million (the difference between the market cap and our valuation). It will be interesting to see what happens to the share price in the next six months.
January 26th, 2007 at 4:28 pm
Rakon is an interesting case. It is an established firm and is well positioned to capitalise on a sector is projected to grow significantly over the next 10 years. The share price has increased dramatically since listing with the current share price implying substantial gowth. The EV/EBIT multiple of 47 provides the clearest indication of the level of expected growth, even an EV/EBIT + 1 of ~ 25 is significantly higher than the comparable companies.
The current price may reflect an expected high growth period of 5 – 7 years. It is difficult to estimate how long Rakon will be able maintain this growth and what competition will emerge. The other key component of the valuation is the capital expenditure. Rakon has declared that it will not be paying a dividend in the next couple years with a focus on growth opportunities.
I think the range produced by Valuecruncher is a fair reflection of Rakon’s value and the current price may not reflect the uncertainty associated with Rakon’s growth opportunities.