ERG 0.00% 6.6¢ eneco refresh ltd

ERG - When is a Quote Not a Quote

  1. 99 Posts.
    The analysis on ERG has been interesting exercise. Lots of different views and noise. The value of debate is to accept, discuss and refute points of view. On balance each member can accept or deny the points of view on a balanced assessment of facts.

    Comments from existing shareholders need to be held in context with the emotion that surrounds the stock. My involvement equates to a zero cash position, members on the site would like to raise a conspiracy scenario which in fact does not exist.

    I am interested in the debate, to date we have listened to the noise…lots of posts the question is whether the debate is relevant and subjective.

    So now for the assessment.

    ERG’s balance sheet reflects an organisation that needs an injection of cash. This is evident by the gearing ratio and the off balance sheet liabilities that form the basis of the underlying risk associated with this business.

    The question is why does ERG have this level of risk that relates to performance bonds.(Refer to the Contingent Liability Note – June 2001) The answer rests across a number of factors. These include, risk associated with delivery of projects. Long term contract commitments associated with the collection of cash from transit providers. In addition it would appear that ERG has also provided guarantees to ANZ applicable to the AFC equipment assets. Just more risk and an incremental burden to the balance sheet that it can not afford or manage.

    This level of risk exposure requires a very strong balance sheet to support the balance sheet going forward and the ability to assume other projects. In essence ERG needs a big brother. Its balance sheet is very weak. Debt upon Debt, Risk upon Risk.

    So how do you convince potential partners to participate in a business that has yet to deliver long-term returns to shareholders? They have some technology but does that technology equate to value. To date this has been problem. The generation of business profits has become an area of concern. Accounting practice have come under scrutiny. The market no longer tolerates accounting practices, which seeks to stretch the parameters of commercial reality and the substance over form principles.

    To put this into context with share value creation, the creation of shareholder value must be demonstrable and not reliant upon accounting entries that generate book profits, the recent balance sheet clean out reflects the FACT that ERG has generated profits by the swift movement of the pen, rather than the creation of real value through basic management techniques that focus on delivering positive cash flow returns.

    This is demonstrated by a number of underlying events. Which stem back to a period when ERG was perceived to be a market darling. This is demonstrated by the June 2001 result. The market was surprised and outraged by the events that surrounded the accounts. The surprise was that the market was not suspecting that the result would be below forecast. Why was the market surprise…..because it was not aware of ERG’s accounting games.

    The ability to recognise revenue and profits applicable to licenses obviously did not satisfy the auditor’s requirements. It did not satisfy the requirements at June 2001 nor did they satisfy the requirements at December 2001. This in itself should raise the eyebrows of the investment community both the institutional investment community and the mums and dads investors (small and large).

    In this regard, Institutional Investors have deserted the stock while the small end of town continues to believe in the dream. On a comparative basis this reminds me of the HIH debacle where the small end of town were left holding the baby. The musical chairs scenario is the equation that most innocent shareholders can not seem to acknowledge.

    In relation to profit forecasts, all this talk of double-digit growth did not equate to bottom line returns. In fact predictions generated by the company did not eventuate. Now to the current predictions made by the company.

    We are going to make a profit in the second half.

    We are definitely going to make a profit in 2003.


    Those members that are interested in the future profitability of ERG and its financial stability of the company should ask the following questions of the company.

    1. Will ERG generate a profit for the first half of 2002 as disclosed in the half years announcement?
    2. How much profit has been generated post December 2001?
    3. What is the current cash position and cash burn rate of the company?
    4. How is the company managing the relationship with the banks following the breach of facility covenants?
    5. Have the banks requested the existing facilities be repaid? If so how much has been repaid?
    6. How has the rights issues monies been applied in the satisfaction of the Proton Acquisition?
    7. How much of this money is available to meet the balance of Proton acquisition costs?
    8. There are many more questions that need to be asked. Use your imagination.

    The relationship with ERG stakeholders must be stretched. Generally “Banks” do not sit around when they are exposed to credit risk. They generally act to take defensive action. Risk management techniques are applied, Banks generally make profits and will not sacrifice their shareholder interests. If the banking sector applied a friendly, its will be OK attitude, can someone please provide me with the bank manager’s name, I will be around tomorrow to re-finance my debts.

    These comments must be taken in context with the crystallization of reality. Did ERG put the market on notice regarding the underlying losses of the company before the recognition of one off losses? Comments in relation to profitability and accounting treatments are a question of interpretation. The facts are the company discloses a Loss of $199 million for December 2001 would indicate that we have a problem

    If this is the benchmark for corporate governance and a measurement of where the company is positioned, comments from the company should be scrutinised and questioned with some level of skepticism. If this level of skepticism has some level of reality comments on profitability will need to be held in context.

    If ERG does not achieve the predictions made to the market what will be the markets reaction and how will it be perceived. In essence the reliance of information provided by the company needs to be held in context of the History. In other words be careful.

    Once again I will reiterate the concerns of astute investors, if a company has a going concern qualification why are they not forced to make quarterly reports to the market regarding profit performance. Has ERG volunteered this information to the market as a good corporate citizen? Look to the announcement and you will see no update to the market as to ongoing bottom line performance.

    Cost cutting announcements should be read in conjunction with the state of the project and delivery cycle. Does the cost cutting exercise represent baseline business costs or are they related to project. If this is the case, this does not necessarily equate to ongoing saving.

    In the event ERG is ever awarded another major contract, the underlying question will be how have they assessed the opportunity, has it been costed, has the delivery risks been understood. To date the company has had a very poor record.

    This company has underlying risks and opportunities it’s a question of balance and a risk and reward equation. It’s up to each shareholder to assess the investment opportunity.

    Used car salesmen come and go. Investors are there for the long haul. Traders are opportunistic and make and loose money on momentum, volatility and volume. In this regard, ERG represents the Holy Grail. If you live on the market you can choose to play the game, ERG provides the thrill and the excitement. With that level of excitement is a level of risk that needs to be measured. Those with weak hearts perhaps this is a stock that should be avoided.

    On fundamentals this stock is going through a transitional period, in need of support, however working in a market where the companies name is not well received by institutional investors and in an environment where the market will question ERG’s ability to deliver projects.

    Reliance on comments made by the company needs to be held in the context of history as being unreliable, to quote from the recent stock exchange announcements does not equate to a statement of fact.

    The Sydney contract will no doubt be decided shortly. One hopes it will be awarded to ERG however the award of the contract does not in itself resolve the underlying problems and concerns surrounding the companies future and its ability to deliver.

    Caveat Emptor – let the buyer be ware


 
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