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| Subject: March 16/02 Berlin Mr Batchelor/smartcard/new contract/Melbourne | |
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Author: anonymous |
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Date Posted: 18:09:40 12/25/02 Wed http://www.theage.com.au/articles/2002/03/15/1015909904427.html ------------------------------------------------------------ Dishevelled darling left smarting Ian Porter March 16 2002 ------------------------------------------------------------ Call it karma or call it coincidence, but Melbourne's troubled public transport ticket system might actually be a twisted mirror image of its maker, ERG. ------------------------------------------------------------ The neophyte commuter in the Victorian capital has to tackle a steep learning curve, especially on trams. ------------------------------------------------------------ The idea - not ERG's it has to be said - was to make people break the habit of a century and buy most of their tickets at shops, away from the transport system. ------------------------------------------------------------ Impulse buyers are catered for on trams with short trip and two-hour tickets, but you can't buy a day ticket and you can't use notes to buy what is available. Not helpful. ------------------------------------------------------------ If you start your journey at a train station, vandals are likely to have made the machine you need to use inoperative. Again, this is not ERG's fault, but it is frustrating. ------------------------------------------------------------ So, the system can be inscrutable. And it often fails to work for its users. ------------------------------------------------------------ This is where the mirror image comes in. Substitute the words "financial statements" for "system" in the paragraph above and you could be quoting any of a dozen analysts talking about ERG's accounts over the past year or two. ------------------------------------------------------------ But it is hard to find an analyst or fund manager willing to talk about ERG these days, reflecting a growing disillusionment with the company. ------------------------------------------------------------ The market's disappointment is most apparent in the company's share price. As recently as June, 2000, ERG shares were selling at more than $4. It was a market darling. ------------------------------------------------------------ Now they are selling at less than one tenth of that. ------------------------------------------------------------ The breach through the psychologically important $1 barrier last year was sparked by a change of heart by auditor PricewaterhouseCoopers last August. ------------------------------------------------------------ No longer would the auditor allow ERG to book as revenue the shares taken up in joint venture companies offshore as payment for licensing ERG's world-leading technology. ------------------------------------------------------------ If ERG did not receive cash for its technology, or the shares received were not listed anywhere, the company could not book any value for them. It did not matter that the joint venture companies had won some of the biggest ticketing contracts in the world and had $60 million of cash in them. ------------------------------------------------------------ It was a tough call. ERG has invested heavily to create its world-leading technology and now it could not book any benefit when the technology won major contracts. ------------------------------------------------------------ Given that directors and shareholders want recurring income from these overseas projects, taking shares in the joint venture companies, which won the big contracts, was the logical way to go. ------------------------------------------------------------ In the interests of accounting clarity - a major issue with analysts - managing director Peter Fogarty and ERG directors decided to clean the slate. ------------------------------------------------------------ "If we were not going to include new issues of shares from joint venture companies in revenues, the logic was we had to take out the other ones to have consistent accounts," Mr Fogarty said in Melbourne this week. ------------------------------------------------------------ That led to $155 million of write-downs and this week's loss of $199 million for the December half year. But those analysts following the company were still uneasy. ------------------------------------------------------------ "The write-off was one thing, but the big concern was that 10 days after they said they would come in between $175 million to $195 million, they came in at $199 million," one analyst said. "If you say 175 to 195, you should try and come in in the middle. It's not a big issue, but ..." ------------------------------------------------------------ Fogarty displays some exasperation at the continuing criticism over ERG's accounts, although he does admit they are difficult to follow with ERG managing different types of contracts and a slate of projects at different stages, as well as research and development investment. ------------------------------------------------------------ "At the moment it does not seem possible for us to provide enough information to convince analysts that we are being transparent, but we are trying." ------------------------------------------------------------ What is obvious is that major ticketing projects are expensive to win, unwieldy to manage, have long gestation periods and often run well over schedule. ------------------------------------------------------------ "Delays are endemic in the industry," the analyst said. "ERG has always been held to ransom in a sense by the timing of these major projects." ------------------------------------------------------------ Fogarty highlighted the problem this week. ERG has invested $4.9 million in winning the Sydney project and $2.5 million in winning the Brisbane project, but the former is running two years late - it was scheduled for the Olympics - and Brisbane is one year late. ----------------------------------------------------------- "In an ideal world, we would have had Sydney start 12 months ago, Brisbane start six months ago and they would have all been slotting in nicely now. But there is no ideal world in business," Fogarty said. ------------------------------------------------------------ "We've been running Rome, Singapore, San Francisco and Berlin all in the same three-year period." ------------------------------------------------------------ Which means there is a traffic jam of projects approaching which, given that cash outlays are heaviest in the early stages, means ERG is facing a potential cash crunch. ----------------------------------------------------------- The company is striving to obtain project-specific bank support for the various projects and also structure milestone payments into the contracts to alleviate this problem. Fogarty says ERG, with reasonable timing outcomes on projects, will be earning $300 million of recurring income by 2004. Again, it's about timing. ----------------------------------------------------------- "What frightened the socks off me about the last earnings report was the directors' comments at the back," the analyst said. "It indicated the situation must be reasonably precarious." ------------------------------------------------------------ In their statement, directors said the results were drawn up on a going-concern basis, but they warned that the main issue was the completion of contractual and funding initiatives. That has been ERG's problem almost from day one, however, as Fogarty freely admits. ------------------------------------------------------------ He told this week's briefing the Melbourne contract was ERG's first major project and the company made a fundamental error - it signed a contract before the specifications were set. ------------------------------------------------------------ Subsequently, there were many changes to the specifications and that has led to a protracted dispute and a lack of payment. ERG invested around $100 million in the Melbourne project and is still waiting for reimbursement of all or part of that - Fogarty won't say how much is at stake. ------------------------------------------------------------ But relief is near, he believes. Transport Minister Peter Batchelor - formerly ERG's bete noir when in Opposition - has been driving negotiations between the State Government, the transport operators and the OneLink operating consortium to finalise the contract. ----------------------------------------------------------- And he believes he is now negotiating with people who actually want a resolution. ----------------------------------------------------------- Settlement of the long-running Melbourne dispute is one of the assumptions underpinning a forecast profit in the second half of the year, and it's a reasonable one given that Mr Batchelor is keen to add smart card technology to the system. ERG, while discussing the smart card idea, is not about to sign any new contract until the old one is resolved. Notwithstanding the cautious statement in the latest earnings release, Fogarty believes ERG will be able to fund the welter of new projects it has won thanks to the support of international banks now willing to lend against the contracts. One of the big tenders looming is for a smart-card system covering the whole of the Netherlands, and ERG has the support of a group of Dutch banks because their joint venture, Banksys, uses ERG technology. "The European banks are more understanding on projects. The Aussie banks, there's one or two that understand it, but the rest don't." That contract will require an outlay of between $600 million and $1 billion but, because the banks will fund it, the contract will be cashflow positive for ERG from the start, if it wins the tender. What is helping in Europe is that major intermediaries like MasterCard and Europay are requiring banks to all be on smart cards by 2005 or they won't back card-based debit transactions. The banks need a smart-card system and ERG's is the most attractive. If the banks do fund the installation phases of the many projects ERG has won - it wins around nine out of 10 tenders it bids for - ERG can stop being a financier as well as a technology provider and just concentrate on what it does best [ Next Thread | Previous Thread | Next Message | Previous Message ] |