Australia | Apr 23 2009
By Greg Peel
Meep-meep!
The deserts and canyons of Arizona, Texas and New Mexico are the setting for speedy coyotes to try and outsmart even speedier roadrunners, as popular culture suggests. Popular culture does not, nevertheless, excuse residents of those states who assume their vehicles have carte blanche to act similarly. But the Arizona authorities’ attempts to curb speeding in the state came to a head last Sunday when the operator of a newly commissioned mobile speed camera van was shot dead by an irate biker.
Thomas Patrick Destories, 68, pumped five bullets into the van operated by Douglas Georgianni as he passed by the mobile speed camera. Three struck Georgianni, wounding him fatally. It didn’t take too long for police to locate Destories, given the whole episode was captured on said camera. A contrite Destories apologised, but is now on trial for Murder One.
Georgianni was an employee of Redflex ((RDF)) – the Australian company specialising in red light and mobile speed camera technology. While Australians have long learned to live with speed cameras, Americans have only just begun to accept their presence. The US has proven a vast growth area for Redflex, as slowly over time various states and counties within those states have trialled and adopted Redflex’s world-leading technology. This has always placed Redflex, GFC notwithstanding, in the category of stocks with huge growth potential. Although it hasn’t always been smooth sailing.
As recently as March 27, a Texas court dismissed a class action brought against the company by disgruntled speedsters on the accusation that Redflex did not hold a private investigator’s licence as required by the Texas Occupations Code. The plaintiffs were attempting to recoup fines they had paid for running red lights. It seemed a long shot, and that’s exactly how the judge saw it (just as well it wasn’t Marcus Einfield). The case was dismissed on the basis companies administering red light programs are not classed as private investigators.
This was a significant win for Redflex, given the precedent the decision set. However the fact the case was brought at all is indicative of just how Americans feel about this supposed challenge to their civil liberties – particularly in the South. Many argue that speed cameras are not about saving lives but about revenue raising. Sound familiar?
Further north Redflex has been more successful. Only on Monday the company announced new contracts for red light enforcement trial programs in a New Jersey town and in a suburb of Chicago. Redflex Traffic Systems now has contracts with more than 235 US cities and is the largest provider of such systems in the country. With photo speed programs in 9 states and red light programs across 22 states, a company press release informs us, Redflex has consistently led the market in contract wins, system installation rates and market share.
Arizona and Louisiana are the only two states in which mobile speed camera vans are operated by Redflex employees. The operation of those vans has now been put on hold in the wake of the murder. Redflex has stated they will stay on hold “whilst the consequences of this tragic act are considered”.
Local television station KPHO reports the Arizona Department of Public Safety has indicated it plans on using mobile photo radar in the future, but it is “unclear when the redeployment would occur”. The reporter also made the point that “several motorists [vox popped] said they like the roads better without the mobile units”.
Blow me down.
Macquarie, nevertheless, suggests in a report this morning that given considerable public backlash to date, Arizona state lawmakers are possibly considering legislation to end the program when the initial contract expires in 2010. Redflex won the contract from the Arizona DPS in July last year with the intention of ultimately deploying 100 cameras in the state, of which 60 were to be fixed and 40 mobile. By December those numbers were 36 and 42 respectively but media reports suggest further rollout has also been put on hold.
Redflex had guided for a 40% increase in profit in FY09 ($21.4m) but Macquarie believes this number relies on a successful ramp-up in Arizona to meet the mark. Hence the broker now sees short term downside risk to earnings and has reduced its forecasts by 22% in FY09, 30% in FY10 and 24% in FY11.
Credit Suisse has also revised down its earnings expectations to below company guidance. CS expects, however, that the affect will only be short term and will not have a significant impact on either FY10 earnings or Redflex’s share price. (The stock has moved no more than with general market movements this week). There is also a small matter of earlier “multiple” bids put to management to acquire 100% of Redflex at or above $3.50. In February the stock was trading closer to this mark, but news has since gone cold.
In the wider picture, neither Macquarie nor Credit Suisse believe the Arizona setback will ultimately undermine Redflex’s longer term potential. “The key catalyst,” says CS, “is establishment of the long term performance that can be achieved from RDF’s new fixed speed cameras, which is expected to be well above that being derived from its red light cameras”. CS is maintaining an Outperform rating with a target of $3.76 (last trade $2.30).
“It should be remembered,” says Macquarie, “that the Arizona DPS is a speed camera program – a fledgling initiative that has longer term upside but does not contribute the bulk of Redflex earnings in a normal year”. The established red light camera market is still growing at 20% plus per year. But the analysts believe the stock may trade lower in the short term given the risks associated with the DPS program. Until they have a better feel for the FY09 earnings impact, they have downgraded to Neutral from Outperform and dropped their target from $3.55 to $2.68.
Macquarie and Credit Suisse are the only two brokers in the FNArena database to update their Redflex forecasts in 2009.
