redflex monopoly?????, page-10

Crookers
Been out just got home here is the answers to your question

First of all if OZ business is really that good you have to ask why is Poltech in liquidation. Also as far as Poltech revenue being 10M, seems high. I remember a while back doing a analysis on Poltech when they announced a 1.7M profit on 7m of revenue. I also remember that of the 7m revenue only about 3M was actually received. The rest was some pretty dodgy accounting assumptions like booking the 4M claim for Hawaii as revenue when you had not received it and was not certain of receiving and still has not been received, The other aspect about OZ is that you can only sell camera’s on moderate margins. While it is true the Governments continue to get large revenues from fines, the camera supplier be it Poltech or redflex get nothing once the camera sale is made. As the cameras also don’t wear out in a hurry it is just a small business.

The reason the USA is so significant is that the business model is the exact opposite. In the USA redflex have to bear the cost of setting up cameras but once set up they get a percentage of the fine. The contracts are usually for 5 years with 2 one year options giving a 7 year total. Also you should bear in mind that so far all contracts which have come up for renewal have been renewed with redflex, so the reality is that these contracts should go longer than 7 years. The payback period is about 18 months so if you are expanding you will keep needing capital for about 3 years after which existing cash flow will self finance new camera’s and start to generate large amounts of cash as the only real costs are the installation cost and some small processing costs.

The other aspect is that you need about 100 camera’s installed to get to breakeven on a cash basis but at 100 you still need new capital for new installs. Redflex over the last 12 months have got through this critical mass point and are now expanding quite quickly. Also in the US there are currently no compeditors using digital camera’s who have got to the 100 installs. The largest competitor ACS has mostly old wet film and are really struggling to get a digital solution that works

The US market is still a virgin market. Only 90 cities in the US have camera’s installed. By cities I don’t mean large cities. For example Redflex’s biggest install base is in cities around los Angeles. The Australian equivalent would be suburbs around Melbourne or Sydney. Each suburb like Richmond or Paramatta would represent a US city. Speed camera’s are almost non existent.

So the simple way to look at is that today in the USA redflex is the market leader with close to 50% share in a virtually untapped market and they actually receive a percentage of each fine. The USA population is 15 to 20 times Australia. If you were to translate this model into Australia and Reflex were to receive 27% of the Government revenue(in California they are get about 27%) then you would have a multi billion dollar company not a 75M dollar company..
Now I don’t expect redflex to grow that big but a billion dollar company is not a unrealistic expectation over the next 7 years

What is important from the Poltech purchase is the Speed camera technology and the access to non Australian/non US markets that Poltech have been granted access to. Unfortunately for Poltech that were financially unable to benefit from the good start they had achieved

As for currency, the 1.76M related solely to comms business. The US business has what is known as a natural hedge. What that means is that all of their revenue and most of the cost occurs within the US . At the moment all excess cash from the US is re-invested into the US so there is no real exchange variance. There is however a impact on reported profit because they report in Australian dollars. When they report ,there net profit result will be lower by the movement in the exchange rate. As such there is a impact to there reported profit result.. A 20% rise in the currency is roughly a 20% fall in the profit.

This is totally different though from a Australia mining company which has it’s revenue contracted in US dollars and the costs in $A. For a Australian mining company exchange can turn a profit into a loss as only the revenue falls and costs remain the same.

For redflex it is the profit which rises or falls as both costs and revenue are in US dollars. So exchange can only increase or decrease a profit it cannot turn a profit to a loss.

The currency hedging and exchange losses refer to the comms divisions as this division has its revenue in US dollars but the costs in $A. Comms revenue is now hedged and as such will no longer make currency losses