Adacel Technologies: The best $100m+ market cap stock on the ASX with no broker coverage?

Pie Funds

Pie Funds

Much like FlightSafety, Adacel boasts a very strong market position, with a dominant market share of the air traffic control simulator training market in the US. 

Adacel is poised to benefit from strong industry tailwinds due to a severe shortage of air traffic controllers around the world, particularly in the USA. The Federal Aviation Administration is expected to invest significantly to increase air traffic controller numbers in the US by 50% over the next five years. Furthermore, over the next ten years, total expenditure on global air traffic management system upgrades is expected to top USD $120bn. This should keep Adacel’s order book at peak levels.

More than 50% of Adacel’s revenues are recurring in nature, almost all its earnings are USD denominated and the company will not be in a tax paying position for the foreseeable future. 

Since we’ve started following Adacel, we have noticed the company has a tendency to under-promise and over-deliver. Over the last twelve months, Adacel has issued a whopping four profit upgrades. The company is currently guiding the market to more than a 50% increasing in profit, putting it on roughly a FY16 PE ratio of 12x. We think that the company is still being conservative and chances are further earnings upgrades will follow. 

The best comparable company to Adacel is probably CAE Inc, which trades at a FY16 PER of 18x but has the disadvantage of $1B net debt on the books. 

Pie Funds has taken a sizeable position in Adacel. In summary, the company ticks a number of boxes for us, including:

  1. The lack of research coverage means Adacel is relatively unknown 
  2. The company stands to benefit from significant structural tailwinds 
  3. There are high switching costs for customers
  4. A strong balance sheet with net cash of $7.6m
  5. A dominant position in a niche market
  6. High levels of management ownership
  7. Disciplined capital management, having acquired competitor CSC’s simulation business at a bargain price 
  8. Strong profit growth momentum

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