Each week, I’ll be picking a random small-to-mid-cap ASX stock that I have rarely seen discussed online (personally, yes I’m aware it may have been discussed at some point in history) – and that I do NOT hold – to cover at a glance.
We’ll have a look at what it does, some of their financials, and conduct some polling on general sentiment. The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week – Adacel Technologies (ASX:ADA).
Company name: Adacel Technologies
Ticker: ADA
Industry: Aviation
Headquarters: Melbourne, VIC
Market cap: $90m
Current share price: $1.175
P/E ratio: 14
1-year Performance: 39.8%
What they do, smoothbrain version: That scene in Breaking Bad where the plane crashes, except in real life. Also, Microsoft Flight Simulator ver. koalas 2.0.
What they say they do, wanky version: “Adacel is the company of choice for Air Navigation Service Providers (ANSPs) worldwide with oceanic, en route, approach and tower airspace environments. More than 21% of the world’s airspace is controlled with Adacel’s Aurora air traffic management technology.” 🍆👋
What they do, actual version: Adacel Technologies are a Melbourne-based business which specialises in the provision of air traffic control systems and services. They provide these products and services to a mix of passenger, educational, military and cargo industries that use air transport in some form.
Their signature product is their “Aurora air traffic management system” which provides your standard air traffic surveillance, however they also have several other core offerings which provide air traffic control training, and simulation for educating and training pilots as well.
It also has aerospace applications relevant to homeland security.
The company operates globally, and while they’re based in Australia the bulk of their revenue comes from the USA, followed by Europe, with a relatively tiny domestic footprint and income.
Adacel was founded in 1987 and listed on the ASX in 1998.
What looks good:
- While people might look at ADA and have the train of thought “Air traffic control = Travel, Covid-19 = no travel, therefore Share price = down”, their client base is diversified enough from their contracts for military and freight that profits actually went up over the last year.
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The majority of their current projected revenue is already locked in via contracts for the next year or two, therefore unlikely to suddenly drop for no reason.
- They deal with pretty large and respectable client bases, e.g, NASA, the US Department of Defense, the Air Force and Navy, etc. which provides them with a level of legitimacy and consistency for their business.
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The relative proportion of their “Systems” sales is growing vs. their “Services” sales, meaning that they consistently have more clients that are dependent long-term on what they offer rather than just for the duration of one contract.
- They have been profitable for 5 of the past 6 years; P/E ratio of 14 or so even after a recent run in share price still indicates solid value relative to their current market cap.
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ADA pays a fairly large dividend for a small-cap company that puts it in the top 25% of dividend paying stonks on the ASX, if that’s your thing.
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They experienced a rapid turnaround financially from a dip experienced in 2019, going from a loss to greatly profitable again ever since.
- They have a pretty solid and diverse base for continuing to grow the business, being relevant to the likes of: universities, training institutes, military and security, air freight companies etc. with a software product that is ‘borderless’ and thus can be used in most markets throughout the world.
- Their military arm may be able to capitlise on the current ‘semi Cold War climate’ we are in globally for government military arms looking to ramp up their training of pilots.
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Their debt to equity ratio indicates a pretty strong financial position.
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In a fairly unusual example of ASX-listed business operations for a small-cap, they continually carry out share buybacks on-market (in addition to paying their dividend), which is planned to continue through to 2022.
What doesn’t look good:
- Their reliance on overseas revenue means they are highly subject to currency fluctuations.
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This is a fairly low volume/liquidity company that may make it hard to ‘get out’ of if and sell your holding if something drastically bad happens to the share price.
- Civilian airlines are still likely to lag behind in terms of recovery for a while as Covid-19 lingers globally, dampening one major client base.
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Their share price tumbled in late 2018 as a result of a loss of a major contract that removed 70% of their estimated profits for the year in a single blow, and it has never recovered close to that all-time high point since. It’s an example of how contract-dependend smaller businesses like this can be.
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There’s a fairly small amount of insider ownership for a smaller company (~16%); the board looks a bit stale and crusty.
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Its all-time high share price was around $3.20 back in 2016, and it’s been a slow crawl back upwards since then. As a result, it’s been a shitty performer for investors for the previous couple of years, before jumping back up again over the past year (particularly after its August 2021 profit guidance update, which saw a large bump in share price).
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The company’s CEO looks wayyyy overpaid to me for a company of this size & earnings.
Summary: Fundamentally, the recent figures of the company over the past few years – and with promising recovery figures posted in 2021 – make this look like a ‘Weak Buy’ to me.
They’ve rebounded nicely after a down year from Covid-related global panic and more than doubled their share price, yet it still seems to have room to grow in terms of a gradual climb back up to where it once was.
Their lack of over-dependence on the civillian aviation sector means that current uncertainty over travel doesn’t really apply too greatly for their bottom line; if anything, the world’s current fairly tense global climate may actually play out in their favour given their military exposure.
As with many companies like this, they also live and die by the contract, however.
Fortunately, the stability of their contracts over the next year+ plus the dividend they pay makes this a fairly solid stock you could hold for some OK growth and extra pocket money without too much fear of the share price tanking.
Their recent business updates have indicated a pretty strong recovery, and fairly positive momentum moving forward with several new contracts & contract extensions having been recently announced in late 2021.
Company website: http://www.adacel.com/
MarketIndex page: https://www.marketindex.com.au/asx/ada
Feel free to add your own opinions on ADA in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
