the butterfly effect, page-5

Bell Potter released this back on 18/11

Recommendation Buy (unchanged) Price $2.70 Target (12 months) $3.50 (previously $3.60)

Initial FY17 guidance of >10% growth in pre-tax profit Adacel Technologies held its AGM today and, as anticipated, provided initial earnings guidance for FY17 of growth in pre-tax profit of at least 10%. Admittedly this was lower than we were expecting (we were looking for somewhere between 15-25%) and was well below our forecast of 22% growth but the company does have a history of providing conservative guidance early in the year and there are still some key tenders to be decided in the coming months. Adacel also added that it anticipates a lower profit in 1HFY17 relative to 1HFY16 (which was not unexpected due to the strength of the 1HFY16 result) but that the outlook for new business continues to be very strong. These comments suggest to us there will be some earnings skew towards 2HFY17. EPS forecasts close to unchanged There is little change in our EPS forecasts over the next three periods (i.e. <1%). We acknowledge the difference between the initial guidance of at least 10% growth in pretax profit and our forecast of now 21% growth but we do expect some contract wins in the coming months and, as mentioned, do see the initial guidance as being conservative. We continue to forecast strong double digit EPS growth over the next three years of 17%, 18% and 13% respectively where the lower forecast growth in EPS relative to pre-tax profit is due to assumed increases in the effective tax rate over the next three years. Investment view: Maintain BUY, PT down 3% to $3.50 We maintain our BUY recommendation on Adacel. We have updated each valuation we use in the determination of our price target for the modest earnings changes as well as market movements and the time creep. We have also reduced the premium we apply in the relative valuations from 10% to 5% given the flagged lower 1HFY17 result relative to 1HFY16 and the assumed earnings skew towards 2HFY17. The net result is a 3% decrease in our PT from $3.60 to $3.50 which is a 30% premium to the current share price and so supports a BUY recommendation.