Why Adacel Technologies Limited shares are soaring higher today

Shares in air traffic control software business Adacel Technologies Limited (ASX: ADA) lifted 18 per cent to $2.40 this afternoon after the company announced updated profit guidance for the 2016 financial year.

The business now expects full year profit to be around 70 per cent higher than the prior year due to new customer wins, contract upgrades, and the falling Australian dollar providing an earnings boost for a business that brings in much of its revenues in the US market.

For the first six months of the year, Adacel now expects profit of around $5.8 million to $6 million, more than quadruple the $1.4 million posted in the prior corresponding period.

In response the share price has climbed more than 700% over the past year from 30 cents to $2.40 this afternoon.

The company’s air traffic management systems are market leading in the giant US aviation market and also have strong competitive positions in Europe, Australia, and Asia among other regions.

These kinds of commercial aviation management technologies are quite sticky once integrated into systems and provide strong recurring revenues on the typically impressive margins of software-oriented and less capital-intensive technology businesses.

The fact that the company’s products are linked to efficient commercial air travel management and safety also provides a moderate earnings moat in a specialist field where there is some competition and elongated tender and decision-making processes on the part of global aviation authorities and regulators.

The profit before tax in the 2015 financial year was $5.9 million, which suggests this year’s profit before tax is expected to come in at around $10 million. Earnings per share could also be expected in the region of 8.5 cents, which would place the group on around 28x estimated forward earnings at $2.40 per share.

The business also has plenty of scope to lift dividends that totalled only 2 cents per share on earnings of 5 cents per share in the last financial year. If you assume a similar payout ratio around 40 per cent, 2016’s dividend could be in the region of 4 cents, placing Adacel on a forward yield of 1.7% when selling for $2.40.

Evidently the company is now priced for more strong growth, although given 2016’s expected performance of profit growth around 70 per cent it may still be reasonable value, with a healthy net cash balance, overseas earnings, and market-leading, high-margin, software products.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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