Bell Potter Rsearch Note 21.07.2016 - Upgrade price target to...

Bell Potter Rsearch Note 21.07.2016 - Upgrade price target to $3.75

Upgrade in FY16 guidance Adacel Technologies (Adacel) has upgraded its FY16 guidance from growth in pre-tax profit of approximately 70% (which equates to $10.1m) to now a range in pre-tax profit of between $10.5-10.7m (which equates to growth of between 78-81%). It is, therefore, an upgrade of between 4-6% in pre-tax profit or an upgrade in the rate of growth from 70% to around 80%. We were forecasting FY16 pre-tax profit of $10.5m so our forecast was consistent with the lower end of the upgraded guidance range. The company also said it expects to have cash of approximately A$15.5m at 30 June (versus our forecast of A$14.8m) and will pay a final dividend at least equivalent to the interim dividend of 1.25c (we were forecasting 2.0c). It also said it anticipates further growth in FY17 but did not provide any specific guidance. EPS upgrades We have upgraded our FY16, FY17 and FY18 EPS forecasts by 2%, 7% and 10% respectively. We now forecast pre-tax profit in FY16 of $10.7m which is at the top of the upgraded guidance range. We then forecast growth in pre-tax profit of 23% in FY17 and 21% in FY18 which is being driven by forecast low double digit percentage revenue growth and continued margin expansion. Our FY17 forecast is consistent with the outlook statement of “further growth anticipated in FY17” though the company has obviously not yet provided any specific guidance for the expected rate of growth. Investment view: Maintain BUY, PT up 29% to $3.75 We maintain our BUY recommendation on Adacel. We have updated each valuation we use in the determination of our price target for the earnings changes as well as market movements and the time creep. We have also increased the premium we apply in the relative valuations from 5% to 20% and reduced the WACC we apply in the DCF from 10.7% to 10.4%. The net result is a 29% increase in our PT from $2.90 to $3.75 which is an 11% premium to the current share price and, with the forecast dividend yield of 1%, the total expected return is 12%.