Redflex caught in two minds Author: Helena Keers Date: 11/04/2006 Words: 461 Source: AFR Publication: The Financial Review Section: Market Wrap Page: 21
The volatile share price of Redflex reflects the attitude of analysts as the red-light and speed camera company has attracted a "buy" and a "sell" recommendation from different analysts in the space of two weeks. Investors who bought Redflex shares back in 2002 at 37? were sitting pretty two years later when the stock hit a record high of $4.20. Unfortunately, in the past few months the shares have almost halved, closing at $2.30 yesterday.
Investment bank Credit Suisse said this share price fall was a good reason to buy the stock. The broker upgraded Redflex to outperform, raising its target price to $2.65.
But last week Foresight Capital entered the fray, recommending investors sell the shares and cutting its share price target to just $2.
Analyst Adam Michell said: "We expect flat earnings at best from Redflex over the next two years."
Market commentators said last week that if success were measured by the number of announcements made to the stock exchange then Redflex was speeding to the winning line.
Since unveiling first-half figures, the company has made five contract and expansion announcements. These equate to over 280 systems installations and underpin the prospect of solid revenue growth.
But Mr Michell said Redflex was shifting towards a fixed fee for new installations which threatened to "potentially incrementally reduce the average fee per system across the group".
The company's performance has had a mixed reaction from shareholders as well as analysts with executive director Bruce Higgins offloading part of his stake last year for about $1 million.
He went on to sell a further tranche in March for about $400,000 just as packaging billionaire Richard Pratt increased his stake, via his investment vehicle Thorney Holdings, to 9.57 per cent from 8.26 per cent.
Redflex has had a chequered year. The maker and marketer of traffic enforcement systems posted a 66 per cent rise in first-half net profits to $5.7 million.
But it also revealed that Lockheed Martin cancelled a lucrative contract in November last year, punching a $5 million hole in Redflex's full-year forecast earnings before interest, tax, depreciation and amortisation.
Redflex had earned only about a third of the contract value when it was cancelled, after it was apparently undercut by a rival, allowing Lockheed to get out under a "for convenience" clause.
Redflex has good long-term growth prospects in the United States, but analysts say it is sensitive to small changes in price, volume and operating margins which makes increasing competition a real concern.
US rival ATS, which is backed by private equity funds, has been pitching for contracts at a discounted price to Redflex. Investors, like Mr Pratt, must hope this is not sustainable.
RDF Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
