AS Aristocrat's profit shocker attests, the US economy is grinding in reverse. But American motorists are moving forward -- too quickly in fact -- to the benefit of the red camera and speed camera operator.
Barely a week goes by without Redflex announcing another contract win, as authorities back public safety over the god-given right of Americans to speed.
According to Bell Potter's John O'Shea, last week's win in Arizona is significant as it is the first time a US state has implemented a state-wide program. Under the two-year deal, Redflex supplies 200 systems including 40 mobile speed vans, 10 mobile red light systems, 90 fixed speed cameras and 30 combination (speed/red light) systems.
"We have been of the view for some time that the US speed market is starting to gain real momentum," O'Shea says. "We now expect other states to watch the results in Arizona very closely as they consider programs of their own."
O'Shea says the Arizona contract is attractive as Redflex will be paid on a "per citation" basis: $US28.75 for the first 1200 fines per month, reducing on a sliding scale thereafter.
The arrangement offers more upside than the usual fixed-fee deals. The risk factor is there is no historical data on infringement trends. Bell Potter assumes 800 monthly fines, falling to 600 by 2013 as motorists get the message that speed kills (the wallet).
Thus, the firm expects $10million of revenue from the contract in 2008-09, rising to $50million by 2011-12. Put in context, Redflex should report revenue of $85 million for 2007-08.
A point of caution is that it takes more to generate revenue than hiding behind a bush with a camera. Installing each camera requires $US85,000 ($89,500) to $US100,000 of capex, which means high working capital and a lag between expenditure and recording the revenue.
Another reservation is that the high $A means Redflex's results will not look so hot on translation. But as Redflex earns, spends and borrows in greenbacks, the ill effects do not extend beyond the window dressing.
We rated Redflex as a long-term buy at $2.84 in November last year. Redflex shares have recovered strongly from a mid-July low of $1.90, which is a pity really because it means the stock's traditional growth premium has been restored. We will maintain a long-term buy.
