Hi Rappaz,Adacel is now a high-margin business, so is able to...

Hi Rappaz,

Adacel is now a high-margin business, so is able to generate higher profits off a lower revenue base. Having said this, I'm expecting 07 June half revenue to be roughly in line with FY06 June half (although 07 June half earnings should come in above 06 june half earnings because of better margins).

Regarding Adacel's R&D grant income, this is pretty constant, so it is not true that this grant income has inflated earnings (i.e., the grant income is not a one-off). Basically, Adacel receives around $1mill every year from the Candian government for doing advanced software development work on Canadian soil. With a business like Adacel's, this R&D work is pretty constant, so this grant income will be pretty constant.

It is true that Adacel will not have to pay any tax this year (and probably next year as well). However, even if we assume a 30% tax expense the Dec half NPAT still would have been $2mill+, which is still an excellent result and a 100%+ gain on the PCP. Adacel seems to be using this tax holiday to bolster its cash reserves. The company has now completely paid off all debt, and if cash flows continue at the current rate, is likely finish FY08 with around $10mill in cash (current cash holding is $4mill).

Adacel is likely to report a FY07 NPAT result of AT LEAST $7mill, but probably closer to $8mill. Had Adacel been required to pay tax this year, the company would most likely report a full year NPAT in the region of $5.5mill. Which ever figure you chose to use as your base, the FY08 result is likely to be at least $2mill higher.

The key point is that Adacel is currently trading on an absolutely tiny earnings multiple, and that earnings are increasing significantly. The stock is trading sideways at present, but one suspects that a significant re-rating is on the horizon.