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CHANNELDEX: Hard times - soft landings

CHANNELDEX: Hard times - soft landings

SecureNet Ltd (SNX $2.40)

Now generating revenue from three main sources - licence fees, consulting, and products and services - SecureNet is aiming to shift from one-off payments to recurrent revenue. This will be achieved through e-commerce trust centres, which are currently being established. One trust centre is currently operating in Hong Kong while another was scheduled for launch (in conjunction with Telstra) in Sydney last month. A third and final centre is planned for Beijing in six to 12 months. The company expects both the Hong Kong and Sydney centres to be cash-flow positive within the next 12 months.

The trust centres will work as a central hosting facility - an Application Service Provider (ASP) - which both government and private sectors can access for their online security needs. "Clip" or recurrent revenue will be derived from transactions involved in activities such as online gambling, online banking and bill payments.

SecureNet will attempt to leverage the huge customer bases of both Telstra in Australia and HK Telecom/HSBC in Hong Kong. Eventually, the Hong Kong centre is intended to service both India and Japan.

The company will continue to sell its encryption products (especially in China); however, it is the transaction-based recurrent revenue from the e-commerce trust centres that is the key to future growth. The Hong Kong centre has been operating since October 1999 and has had a slow start. The launch of the Sydney centre will provide a better indication of the effectiveness and potential of the centres as revenue generators.

For the full year to June 2000, SecureNet reported revenue of $21.1 million, an increase of 75 per cent on the previous corresponding period. Net profit before tax was $2.91 million (up 152 per cent). Revenue for the first half was $13.4 million, up 114 per cent on the previous corresponding period. Earnings before interest, tax, depreciation and amortisation were $2.0 million, with net profit after tax of $1.5 million (a $698,000 loss previously). Cash levels were $110 million for the first half. R&D, which is capitalised, stands at $2-$3 million per annum.

Consensus estimates for SecureNet are forecasting a net profit for 2001 of $3.5 million, rising to $7.4 million in 2002. Earnings-per-share is forecast at $0.055 and $0.10 for 2001 and 2002 respectively, representing price/earnings ratios of 43.6 times for 2001 and 24.0 times for the following year.

MYOB Ltd (MYO $1.49)

In early May, MYOB held its AGM indicating that "year-to-date company performance has been below expectations". While North America and New Zealand were tracking above plan, Australian support sales have been slightly down and "expense reductions have been insufficient to enable the company to achieve its planned profit for the first quarter".

The US operation has implemented a number of new initiatives while Canada has maintained its market share growth, which is double the same period in 2000. New Zealand has started the year soundly with profit above plan and is confident of achieving a good first half.

However, the UK has been weaker than expected although the outlook is encouraging. In Asia, the company is achieving plan mainly in Malaysia and Singapore. While MYOB Hong Kong exceeding revenue expectations for the quarter, although higher expenses - due to a recent acquisition - have reduced its profit contribution.

Although down on plan in Australia, support sales are well ahead of last year. Nevertheless, product sales in both the small business and accountant markets have been weak. In line with the softening of revenue, management has implemented significant expense reductions. The lead up to the end of the financial year is expected to drive most of MYOB's new product sales this half. Most full-year profit forecasts depend on MYOB increasing its recurring revenue per customer and its ability to manage the cost base.

Key initiatives include MYOB's expansion into the handheld computing arena, allowing users of Palm devices to take major components of their business on the road. Also, MYOB has launched its Accounting Plus product into four markets in Latin America, as well as introducing a new version of AccountEdge specifically designed for Apple's new operating system, MacOSX.

ERG Ltd (ERG $1.66)

There is significant potential for ERG with its exposure to smart card growth, anchored by transit systems. Smart cards have been the mooted electronic payment platform of the future for nearly 10 years. To date, a lack of economic feasibility has kept the smart card penetration rates low outside Europe. However, transit has been a catalyst in driving mass acceptance of smart cards in cities and acting as a "Trojan Horse" for smart card environments.

ERG is the global leader in this space with a track record of delivery (the Hong Kong Octopus System) coupled with contracts coming online, such as those in Rome and Singapore. Hong Kong remains a case study for the effective roll-out of smart cards to the majority of the population (90 per cent), as well as driving multiple applications on the same smart card, including building access and purchases in convenience stores and on vending machines.

The key issue for ERG remains the monetisation of its smart card software, which is effectively a clearinghouse (a system for information handling and processing) for smart card transactions. Revenue visibility today is low; however, management believes transparency should increase with new joint venture operating companies in Europe expected to provide evidence of ERG's position in this market.

ERG's profits today are largely driven by installation and operating revenues associated with AFC contracts. The market expects underlying AFC contract growth to provide a level of support for the stock, with joint ventures (especially in Europe) providing potential upside.

Consensus estimates are forecasting revenue for the 2001 financial year at $390 million. Net profit is forecast at $41.8 million (up 18 per cent) in 2001, and rising to $50.1 million in 2002. Earnings-per-share is forecast at $0.061 and $0.074 for 2001 and 2002 respectively, representing price/earnings ratios of 27.2 in 2001 and 22.4 in 2002.

Sausage Software (SAS $0.54)

Sausage Software recently announced the placement of 36 million ordinary shares to raise $17.3 million. The funds will be used for additional working capital and to take advantage of any new business opportunities that may arise. Sausage also proposes to issue up to 17 million options to directors and employees under the existing Employee Option Plan at a strike price of $0.48, subject to shareholder approval. The company will also seek approval to change its name to SMS Management & Technology at a General Meeting.

Sausage moved to break even during the March quarter and is "confident of this situation being maintained for the full year". The capital raising will provide a buffer should the company move back into the red - now stands at $13.6 million, but cash burn for the first half of 2001 stands at $16.2 million.

Consensus estimates are forecasting a loss in 2001 of $15.9 million, followed by a maiden profit of $5.2 million in 2002. Earnings-per-share in 2002 are forecast at $.018.

Julia Corporation (JLA $0.08)

Julia Corporation is a mineral

exploration company with a number of investments in high technology companies. These investments include:

7 Banque-Tec International (4.7 per cent): designs and manufactures smart card technology, emphasising radio frequency "contact-less" smart cards for application where control and security are required. Banque-Tec is also undertaking research into biometric face recognition.

7 Smart Silicon Systems Pty Ltd (100 per cent): designs and manufactures computer hardware such as the Smart Mouse, an integrated smart card terminal; and PC Mouse, an integrated smart card terminal featuring a multiplexed smart card and mouse data protocol that allow a PC to be used for Internet-based e-commerce. SIM Manager, is a smart card reader that enables a user to copy the contents of a mobile phone SIM card to a PC. CardPro has been certified NETS E-Wallet-compliant in Singapore, and can be used for online transactions. The unit has been certified compliant for Windows NT4 and Windows 2000, and has also been tested by Telstra. Smart Silicon's products will be marketed and distributed in China by Televoice Information Development Ltd, with Vodafone holding exclusive rights to distribution in Australia, New Zealand and Fiji.

7 Unicard Group (100 per cent): provides "user pays" solutions to educational institutions for the provision of photocopying, network printing, point of sale, student ID cards, access controls and database integration. The company is currently installing systems at the University of Western Australia that provide a fully integrated, campus-based smart card system. Unicard also has a contract to supply, install and maintain a digital drivers licence system for the Northern Territory.

Tomato Technologies (TMO $0.35)

Tomato Technologies provides software research, development, financial membership-based subscription services and Internet Web site/portal development services. The company's main product, Blue Chip Trader, is a market analysis and portfolio management software system which can provide updated share market prices either manually or automatically through the Internet (via onlinestockdata.com). Blue Chip Trader is sold internationally to clients in Hong Kong, Israel, New Zealand and the US. Expressions of interest have been received from 24 countries.

Tomato Technologies has many facets:

- Onlinestockdata.com (Online) is a financial Web site subscription service providing ASX market prices and other information daily via the Internet; this service is currently available to the members of Blue Chip Trader only;- Try9.com, currently in beta testing, will offer a search engine portal that enables a simple multiple search capability across up to nine global search engines and nine countries simultaneously;- Fasttrade.com.au will be an online discount brokerage and share trading facility to be launched during 2001;- Plus Investment Advisers Pty Ltd will offer investment advisory services and has applied to the ASIC to become a licensed investment adviser (Tomato has signed an agreement to acquire Collison Finance and Investments Pty Ltd, a specialist investment and mortgage financing business).


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