I bought into ERG only recently and have not been affected by recent SP weakness. It is possible that yesterday's brief fall was influenced by my talk of $1.8mill operating profit, instead of the headline NPAT of $16mill.
I'm basically a contrarian, 'value' investor with an energy/tech/biotech focus (although I also have significant property assets and hold the standard array of banking stocks). This means that I mostly place bets on stocks that the market hates, but stocks that my research shows have strong turn-around potential within a 12 month time frame. I buy ahead of the curve, so expect volatility.
For example, around 12 months ago, I bought 20,000 shares in PHY at 2.70 (later increased to 100,000 shares at 3.40) on the basis of its low share price, solid balance sheet, strong pipline of projects, takeover potential, and a bet that Labour would win the Fed election and increase MRET. I then started posting positively on PHY. Many people on these boards replied to my posts by calling PHY a "dog stock" and one to short. For a time, the negative posters had their way, and at one stage the stock fell to around 2.55. But I held on, and over the last 9 months things have gone almost exactly as I predicted (with the exception of Labour winning the election of course). Following the strategic review, my research on PHY was distributed (by PHY insiders) to Carnegie Wylie and the Fairfax media and played a significant role in shaping public expectations about the take-over price (which likely had an influence on potential suitors' internal valuations). I'll be sorry to let go of PHY.
Over the next 12 months, my research leads me to beleive that ERG, ADA, and PBT will each generate roughly 100% returns for investors buying at current prices (i.e., buying at 25c for ERG, 31c for ADA, and 15c for PBT). Both ERG and ADA have clean balance sheets, sufficient cash to cover operating activities, obvious takeover potential, and strong growth potential with significant new contracts on the horizon.
But the most attractive aspect of ERG, ADA and PBT is their extremely low share prices.
Both ERG and ADA are likely to report solid profits this FY, yet both are presently trading on price to expected 05 sales ratios of around 0.5. How many other stocks on the ASX will be profitable this FY (and stongly profitable next FY) and yet have a p/s of 0.5? And ERG is probably alone on the ASX in trading below NTA while being profitable and with easily managable debt. In short, the market has priced these two stocks as if they were expected to post massive losss and be saddled by unmanagable debt, when in fact the opposite is true. (The reason the market has done this is that the market is still judging these stocks on the basis of performance over the last 3 years, without looking at recent balance sheet improvements or taking into account new growth opportunities and management re-focus. Most day-traders don't know how to read a balance sheet in any case).
PBT is also in a class of its own on the ASX in trading at a 30% discount to current cash assets (of a healthy $26.5mill), despite maintaining PBT-2 in phase I, a Parkinson's compound about to enter pre-clincal studies, and strong support from scientific peers. The science behind prana's MPAC's is as relevant and promising now as it was before the PBT-1 cancellation.
It is of course possible that some external disaster will put an end to my positive expectations about these stocks, but such distasters can happen to any stock in any market, and at any time. So it is on the balance of probabilities that I stand by my recent investments in ERG, ADA, and PBT (with a 12 month time frame) and will buy more of each stock should the opportunity present itself.
Since this an ERG thread, a few more ERG specific points:
1) If you include the $25mill credit facility, ERG presently has more than $85mill worth of cash/credit at its disposal, assuming most performance guarantees are met.
2) The company is expected to receive significant further influxes of cash from Sydney, San Fran and Seattle over the next 12 months, which will entail the company posting a significant positive cash-flow in FY06. Insto investors/fund managers love cash. And while most Aust insto's are not yet aware of ERG's improved prospects re cash-flow, I think it is only a matter of time before they take another look at ERG and invest accordingly.
3) Over the next 6-8 months I think the balance of probabilities favours ERG winning around $120mill of new contracts, including: Las Vagas Toronto Houston San Diego
4) Possible court action against Thales will be postive for ERG in my view. In the short term it sends all the right signals to competitors (especially Thales), investors, and potential contract city agencies. In the medium term, it could result in a massive positive re-rating of ERG.
While ERG has long had the best technology within the smart card market, it has suffered in the past from incompetent senior management/stupid financing decisions/Proton fiasco etc etc. Recent significant improvements to ERG's balance sheet, a more agressive stance towards competitors, and an improved focus within the company lead me to beleive that ERG finally has the competent management needed to fulfil the potential of its smart card IP.
ERG Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
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