Australia | Sep 25 2006
By Chris Shaw
Since peaking at more than $4.00 per share in 1999 it has been a tough few years for Adacel Technologies (ADA), as shares in the developer of advanced simulation and control systems for the aviation and defence industries have fallen to around 50c following five consecutive years of losses.
Intersuisse suggests there is now an opportunity in the stock though, as FY06 marked a return to profitability and in the broker’s view the potential rewards now outweigh the risks, justifying a Buy rating.
The profit turnaround in FY06 was seen as “impressive”, as while revenues increased to $52.4m from $37.3m in FY05, the earnings before interest, tax, depreciation and amortisation turnaround was even better as the company moved from a loss of $7.2m to a profit of $5.6m, with net profit coming in at $4.9m including a $1m tax benefit.
In earnings per share terms the profit result equated to 5.6c, the broker anticipating further gains in coming years. As evidence of this, it notes the company’s second half performance was far stronger than the first half, as while revenue was up 5.1% pre-tax profit was more than four times higher, reflecting better margin and cost performance.
The broker points out while a full year performance at a similar rate would represent earnings per share for FY07 of 7.9c, the uncertainty over the timing of contracts and a desire to take a more conservative stance has the broker anticipating an earnings per share result of 6.2c this year.
Such a result should be achievable as the company has enjoyed good recent success in scoring new contracts, the broker noting in the first half of FY06 $30m in new work was won, followed by a further $13m in the second half and more than $12m so far in the current quarter. Importantly the revenue gains appear more sustainable going forward, as the broker notes 45% of group revenue now takes the form of recurring revenues.
The company also stands to benefit from strong growth in its markets, as recent years has seen both an increase in the number of budget carriers entering the global aviation industry as well as strong growth from the Chinese market. This increases the need for air traffic controllers, the broker noting the company’s training systems offer cost and time benefits in meeting this need. As a result, the broker is expecting strong earnings growth to continue for several years.
The FN Arena database shows none of the leading brokers or equity researchers cover the company, which is no surprise given its market capitalisation stands at only $44m at the current share price. Assuming solid earnings growth is achieved, and earnings per share of 7.9c this year would represent a price to earnings ratio of only 6.3x on the broker’s estimates, it would suggest the stock stands to gain a wider following if it can deliver on its potential.
Adacel shares today are currently untraded, having last changed hands at $0.50.
