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Redflex Hits A Speedbump

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Just as the traffic camera operator looked to be “moving forward” – obeying all speed limits and red lights of course – along comes another snafu for the strife-prone company.

This time Redflex is in the poo in its home state of Victoria, after close to 100 of its cameras were afflicted with the WannaCry ransomware virus. The glitch forced Spring Street to cancel or suspend about 10,000 fines and we all know governments love to forego such revenue. Tetchy Victorian police minister Lisa Neville – who alleges Redflex was tardy in reporting the virus – has ordered a full review, which in political speak means heads will roll other than the minister’s.

Redflex has not commented on the issue and – more pertinently – has not said anything to the ASX. Presumably it’s not material. The Vic tech glitch comes after a string of good news for Redflex, which from 2013 was embroiled in a US ‘cash for cameras’ bribery scandal that saw the jailing of the company’s US chief, Karen Finley.

In December last year Redflex struck a non-prosecution agreement with the US Department of Justice: no fine, $US100, 000 restitution to Ohio’s City of Columbus and an unquantified payment to the City of Chicago (where most of the shenanigans happened). Redflex then settled a civil action in Chicago for $US20m, $US10m by December this year and the rest by 2023. The headline claim was for $US377m.

The City of Chicago then restored Redflex as a “responsible business” able to bid for new contracts. In the company’s words, this reflected “extraordinary changes” to the company’s leadership, culture and risk and compliance practices over the last four years.

In further good tidings, NSW Roads & Maritime Services extended Redflex’s mobile roadside enforcement contract by one year, for expected revenue of $13m over this period.

And the eyes of Irish speedsters are not smiling after the company secured a six-year contract with the GoSafe enforcement arm, worth $8.5m over six years.

The US remains a crucial geography for Redflex, with The Americas (mainly the US) delivering 56% of revenue in the last half. Unlike elsewhere, Redflex operates a “build own operate’ model which involves running the programs on a “per citation” basis.

As you could imagine, that goes down hank with motoring lobby groups and the more populist politicians. But the model can be lucrative, albeit requiring more upfront capital.

“Our contract renewal rate remains strong and the terminations are generally the result of the cessation of photo enforcement in a particular locality, not losses to our competitors,” Redflex says.

In a business update in mid May, Redflex flagged full-year ebitda of $10-12m, compared with last year’s $25.6m. Redflex generated $6.98m in the first half, on revenue of $62m. A $32m pre-tax loss reflected the $25.9m discounted cost of the Chicago city settlement. Over its 20-year listed life, Redflex has severely tested the patience of investors.

It’s proved too much for long-term holder Thorney Investments, which held a circa 7% stake but has moved below the 5% substantial level. Redflex shares peaked at $3.35 in November 2007 but now trade well below net tangible asset backing of 53c a share.

Redflex’s balance sheet and cash flow are fine, but the company needs to show it can drive consistently in the fast lane to regain the market’s battered confidence.

View More Articles By Tim Boreham

The New Criterion is authored by Tim Boreham.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small to mid cap stocks in an accessible and entertaining manner for both retail and professional investors.

Disclaimer: The author nor Independent Investment Research have received a fee or any kind of inducement for this article. The New Criterion is not intended as specific investment advice and readers should contact a licensed financial adviser.



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