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Why the Adacel Technologies share price has climbed 30% in 2019

The share price of Adacel Technologies Ltd (ASX: ADA) has risen 30% to 85 cents in 2019. The strong start to the new year has occurred because of last week’s announcement of a contract renewal with the United States Air Force (USAF).

USAF contract 

Adacel announced to the market last week that it had been awarded a contract by the USAF to continue providing services to support the USAF’s ATC Tower Simulator System program. The company has delivered over 100 simulators since the original contract was won in 2002.

With the program now in a sustainment phase, the terms of the new contract state that Adacel will retain responsibility for the maintenance, support, and modernisation of the Tower Simulator System units at USAF installations all over the world.

The terms of the contract also specify a base year period performance with a further four option years, which would see program support continue to the end of November 2023 if the option years are exercised by the USAF.

Adacel has estimated that the value of the contract is $32 million on the condition of the options being exercised over the 5-year term.

Foolish takeaway 

Adacel develops simulation and control systems for military and commercial use in the global aerospace systems market. Whilst last week’s announcement was good news for the company, the stock is still down 62% over the last 12 months following the loss of a significant contract and a profit downgrade.

In November, Adacel announced to the market that it expects profit before tax for the first-half of FY19 to be around 65%-70% lower than the prior corresponding period. Profit before tax for the full-year is forecast to be between 25%-35% lower than FY18.

The fall in first-half earnings was attributed to the previously announced loss of the FAA (Federal Aviation Administration) Tower Simulation Support Contract and related issues. Furthermore, additional investments in research and development, sales and marketing and adverse foreign exchange movements has resulted in a lower full-year forecast.

Adacel has commenced legal proceedings for breach of contract and infringement of intellectual property rights against Adsync Technologies, who won the FAA Tower Simulation Support contract. The company is pursuing all available legal options, including the recovery of appropriate financial damages and costs. As a consequence, Adacel has removed all FAA Tower Simulation System revenue contribution from FY19 guidance until the issue is resolved.

In light of the uncertainty from this matter surrounding the stock, investors may want to consider other small cap technology stocks such as Citadel Group Ltd (ASX: CGL) and ELMO Software Ltd (ASX: ELO).

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ELMOSFTWRE FPO. The Motley Fool Australia has recommended Adacel Technologies Limited and ELMOSFTWRE FPO. 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 Scott Phillips.

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