While virtually no one has noticed it yet, Adacel has today...

While virtually no one has noticed it yet, Adacel has today released an excellent profit result: 06 NPAT came in at $4.93mill, with an improved result forecast for 07. The company also generated a cash inflow during 06 of $6mill. Assuming the market values Adacel on a historical p/e multiple of 20 (or forward p/e of 15), it looks like Adacel's market cap is heading towards $100mill or around $1.15 per share in the medium term (current SP is 46c).

The result is well above my forecast (which I put out after the half year results) of $3-4mill.

Looking ahead to FY07-08, significant increases in earnings from current levels will be dependant in large part on Adacel winning the Airservices Australia contract and the FAA contract. (Combined, these two contracts have a probable value of between $100mill and $140mill, and will likely lead to significant follow-on contracts in Europe, India and China over the long term). If Adacel does win both of these contracts, my spreadsheet tells me that FY07 profit is likely to come in at around $7mill, and FY08 profit is likely to be around the $10mill mark (I'm ususally slightly conservative in my forecasts). Indeed, if Adacel does win both of these long-term contracts, earnings will be assured over the long term and the market could begin to value Adacel on a multiple as high as 25. Assuming 07 earnings of $7mill, a multiple of 25 gives us a 12 month price target of $2 per share.

While $2 in 12 months is a best-case scenario, an increase in Adacel's current share price (46c) of over 100% over the medium term seems realistic and achievable.

We should hear something in regard to one or both of the above mentioned contracts in the next couple of months. The key risk going forward is (i) contract timing, and (ii) changes to the conditions/size of the contracts.

See my earlier posts (also on SS) for more details.