Valuing Adacel

Valuing Adacel. Following recent analyst briefings, Brent Mitchell at Shaw valued Adacel at $1.50 per share. In a private conversation, Alex Milton at Macquarie, who presently has a 'market perform' on the stock, told me that "the $1.50 valuation is reasonable if Adacel's forecast profit materialises. Indeed, if Adacel gets it right it's a $3.00 stock". By "getting it right", what Milton meant was that Adacel needed to focus less on revenue growth and more on profit growth. Milton's complaint about Adacel, and this is a complaint held by many shareholders, is that Adacel has in the past been too quick to sacrifice short-term profit for the sake of long-term revenue/profit growth by spending money on product development and positioning itself in the North American market. The emerging view among people who follow this stock closely is that ADA's North American product development expenses peaked in 2001-02. Thus, the reason why the company is confident of a decent profit in the second half of 03 is that it will benefit from ever-increasing revenue (primarily from the USAF contract) and lower/stable product development costs.

Depending on who you speak to, Adacel is expected to post NPAT of between $3m and $7m for 03. My feeling is that the $7m figure could only be acheived if ADA also benefited from a significant upswing in domestic IT spending (i.e., non ATC revenue) in 03.

Another fact to keep in mind is that ADA is currently sitting on an accumlated tax benefit of $7m. I.e., ADA can earn up to $7m and pay no tax.

One final point. Everybody (including people who have a 'show me the money' attitude towards ADA) agree that ADA's air traffic management/ATC simulator technology is extremely valuable and that its potential is only just begining to be realised. How valuable? It has been put to me by a defence/aviation contact in North America that ADA's air traffic management/ATC simulator technology is worth something in the order of US$100m to any potential buyers. Thus, hypothetically speaking, if a company like Lockheed Martin thought it should own Adacel's air traffic management technology, it could be paying something like $3.50+ per share (valuing the company at around AUD$175-200m without even taking into account ADA's business solutions).