NPAT up 244.8% but cash conversion fell to 55.6% on inventory build

The headline is a step-change in profitability, but the cash quality behind it weakened: operating cash flow rose only 50.7% to $30.2m, so OCF/EBITDA fell from 85.4% to 55.6% and FCF/NPAT conversion fell from 164.5% to 60.6%.

The drag came from working capital and capex. Inventories rose 52% ($19.6m) to $57.3m and inventory days extended from 107 to 122, while capex more than doubled to $10.2m (5.9% of revenue, up from 3.3%). Receivable days improved from 89 to 70.

Cash on hand rose to $39.2m against $16.0m of borrowings, leaving Rakon in a $23.2m net-cash position with equity of $135.2m.

OCF/EBITDA dropped roughly 30 percentage points and free cash flow ($20.1m pre-lease) covered only 60.6% of NPAT, against 164.5% in FY21. This matters because the gap between reported earnings growth and cash generation is now wide enough that the underlying economic improvement is materially smaller than the NPAT print suggests.

Inventory absorbed most of the cash gap. A $19.6m inventory build with inventory days extending 14 days is consistent with protective stocking through component shortages, but it carries obsolescence and write-down risk if demand cools. Trade receivables tightened (debtor days fell 19), so the working-capital pressure is concentrated on the inventory side, not the customer side.

Tax normalisation distorts the NPAT optic. The effective tax rate moved from –13.7% in FY21 (a tax benefit) to 21.0% in FY22, so PBT growth of 274.1% is the cleaner read on operating performance versus NPAT growth of 244.8%. Both are strong, but the 29.3pp gap between them is mechanical, not a deterioration.

So this result delivered against, and beat, the only stated quantitative target.

No FY23 guidance, forward order book, or revenue target was disclosed in the supplied materials, and the second-half profile shows H1 carried 57.2% of NPAT and only 14.9% of operating cash flow — meaning H2 was the cash-recovery half, not the earnings half. Without a forward-work or guidance anchor, FY23 trajectory is not assessable from this release.

PBT growth of 274.1% reflects genuine operating leverage on a 34.1% revenue lift, and ROE expanded from 9.3% to 24.5%, indicating the higher profits are flowing through to capital efficiency. New segment disclosure shows Telecommunications at 50.2% of revenue (44% gross margin) with higher-margin Space & Defence (69.4%) and Positioning (56%) supporting mix.

The quality concerns are timing- and balance-sheet-driven rather than accounting-driven:

• Inventory build of $19.6m drove most of the working-capital outflow and is the single largest reason cash conversion fell.
• Capex stepped up 142.5% to $10.2m, raising capex intensity to 5.9% of revenue and depressing free cash flow.
• The 80%+ of cash flow that arrived in H2 (HY22 OCF was just $4.5m) suggests the working-capital pattern was lumpy within the year.

A new dividend policy was announced but no dividend was declared for FY22, so capital-return follow-through cannot be tested yet.

This briefing cannot assess underlying demand visibility, customer concentration, or the durability of segment gross margins without forward-order, customer-mix, and segment-trend disclosures that are not in the supplied materials.