erg short sellers: time to close positions?

Here are some of my thoughts on the current state of play re ERG:

1) Recent analyst report failed to include $5.6mill profit from sale of Balcatta office building in full year result estimate. Assuming this is booked in the June half (it is possible that settlement might push it into FY06), I'm expecting ERG to post NPAT of $21mill, operating profit of $1mill, and revenue of $215mill this FY. If my numbers are accurate (and they usually are), ERG should record a solid result this FY and set the scene for an excellent FY06. And given that ERG is currently trading below NTA, if the above numbers are in the ball park, the FY05 full year results will demand a significant re-rating of ERG's share price.

2) What HC downrampers/short sellers/recent media reports are not sufficiently appreciating is the significance of a company trading below NTA backing. NTA backing is an effective base that tells professional investors and smart traders that there is little room for significant further downside (short of some major, unpredictable disaster). Thus savvy punters (including institutional investors) are now looking for the upside catalyst. I.e., savvy punters know that profitable companies eventually trade well above NTA backing, and ERG will be no exception.

3) Even without a firm buy trigger in July (such as a new contract win), I'd expect the share price to drift back towards 30c during July simply because of the absence of tax-loss sellers.

4) ERG is in the advantageous position of owning some of the proprietary software that is likely to be used in many of Thales future contracts (including, possibly, Melbourne). Given that ERG is withholding legal action against Thales, this leads me to speculate that ERG is attempting to position itself for some kind of partnership with Thales. Indeed, given (i) ERG's $200mill investment in its proprietary software, (ii) the fact that the company is presently more or less debt free, (iii) ERG's healthy long term revenue streams from existing contracts, and (iv) ERG's low share price. ERG is an obvious takeover target from Thales. An ERG-Thales team would blow Cubic out of the water and effectively 'clean up' the lucrative, rapidly expanding, global smart card market.

5) Even without a takeover/formal partnership, if Thales win Melbourne, I'd expect ERG to be in line for sub-contracting work.

6) Delays are the norm in this industry. Just look at many of Cubic's recent projects or Thales in Denmark. ERG's recently announced delays are in keeping with this norm and, while worth keeping an eye on, are not cause for significant concern at the present time.

7) Assuming Sydney delays are kept to acceptable levels and that milestone payments are made, and assuming the Italians get their act together re Lazio, I'm forecasting the following numbers for FY06:
Revenue:$350mill
Operating profit: $21mill
NPAT: $25mill ($31mill if Balcatta office profit is not realised in FY05 and is pushed into FY06).
Free cash flow: Very hard to predict, but I think $30mill could be in the ballpark.

If these numbers are close to the mark, FY2006 will be a very profitable year for ERG shareholders smart enough to buy at current levels.

Shorting ERG at the present time looks like an act of insanity to me.