Great posts guys.I still take an opposite view to you Informer....

Great posts guys.
I still take an opposite view to you Informer. I believe that ERG shares are good value at current prices.
Now is a very good buying opportunity for investors who have the cash to risk putting into this company. However, there are still some negatives that may pop up.

ERG will be announcing their full year results in September, 2002. Some predictions are:
$19Million loss from Assirt Equities (recommendation:SELL)
$208Million loss from UBS Warburg (recommendation:SPEC BUY)
Who will be right? Normally it is somewhere in between. I hope it is closer to a $19Million loss, but think that ERG will report approximately $100Million loss for the full financial year.

There are some positives on ERG's balance sheet that have been previously mentioned as negatives. One is that ERG are due to pay $250Million in Convertible Notes due in October 2005. ERG, if they have the cash can start to purchase these Notes today. This will reduce the liabilities on the balance sheet by $250Million, but reduce the cash at bank by $118Million (current price for ERG convertibles is approximately $6.40 multiplied by 18.5Million). This is a gain of $132Million in Net Assets if ERG management purchase these notes.

With the current transit card projects nearing completion in the next twelve months you will see a pile of cash being built up in this company's bank account and to buy the notes back may be the best use of its resources. The approximate amount coming via these projects is roughly $153Million (acc.receivable amount from trade debtors). They have said that they will purchase notes back this year previously, but to date there has not been an announcement saying what and when purchases have taken place, if any at all. I believe that this delay in repurchasing notes is due to the delay in some projects funds being paid by customers.

Management at ERG have started the clean up process of the balance sheet. The only item that is remaining that is suspect is the capitalised project management and software costs. These are on the balance sheet as an asset and valued at $161Million (note 15). This item is being depreciated over ten years. I am not entirley sure what this is, but for a guess it may be for the current transit ticketing implementation project costs. If this is written off it will mean that ERG report a loss closer to the $208M predicted by UBS Warburg, maybe greater.

This item may give an indication of how much money ERG has tied up with the implementation of projects that it is working on at the moment. However I would have thought that a better place to put this amount would be in the Accounts Receivable. As I said previously this may be a suspect accounting problem.

As for ERG's management not being able to deliver on time, this is mainly due to the size of the projects. I have dealt with projects of up to $1M and it is rare that even these get delivered on time. Usually they are over by at least one month. Normally this is due to Project Managers over delivering on Projects. It is a good sign that this may be happening (ie, satisfied customers). The other explanations are that ERG may be under staffing implementing the projects, the client may be changing the deliverables required or the governments that ERG work for are not responding to requests for information quickly. Either way ERG will be either cost neutral upon delivering or earning additional income (nb: understaffing usually does not save money, only keeps staff employed for longer, however may impact bottom the line by holding back other projects that could be started sooner)

With all that said I am sure that there are other negatives that may pop up, but they will not be significant. ERG has moved into the major transit ticketing system implementation industry in the last six years on a major scale (melbourne project) and has escalated these activities over the last couple of years (singapore, toronto, san francisco, rome, etc). Unfortunately the best time to analyse this company will be when the 2003 financial report is released or when the large scale projects are completed. At the moment it is very subjective and there is a lot of potential for risk.

On the sunny side, ERG's future results in 2003 may be profitable. How much will this profit be? Anyone's guess (I am not about to speculate until the 2002 results are released). This is dependent upon if it wins any projects over the next year. If it wins projects there will be a short term negative impact upon ERG's bottom line, generally $20M per project. The short term negative impacts do not outweigh future tangible benefits that these projects add to ERG's bottom line so it will be a great concern if ERG hold off on beginning big ticket implementation projects.

A major concern that I have for this stock is that my shares will be significantly diluted over the next couple of years. Over the last year shares on issue have increased by over 30%.

Please note, I have not even talked about ERG's leading edge Smart Card technology. It will take a long time for industry competitors to get to ERG's current position, however they could do it within two to three years. This Smart Card technology adds strength to ERG when it tenders for ticketing system implementation projects.

In short, ERG has some potential significant problems still, however I believe that it has the potential to deliver profit reports above $0.10 per share in the medium term. This is dependent on management not diluting equity further.

Best of luck all.