Looking for big returns? Have a high tolerance for risk? If you've answered yes to both, then you might want to check out the small cap ASX share in this article.
It has been named as a buy by analysts at Bell Potter and tipped to rise strongly from where it currently trades.
Which small cap ASX share is a buy?
The small cap that Bell Potter is bullish on is Adacel Technologies Limited (ASX: ADA).
It is a technology company that develops advanced air traffic control simulation and training systems and state-of-the-art air traffic management solutions. Its customers include international air navigation service providers (ANSPs), military, defence and security organisations, universities, and airport authorities.
At the last count, more than 21% of the world's airspace was managed with Adacel's Aurora ATM software.
Bell Potter notes that Adacel has announced that it has retained the FAA contract for Tower Simulation System (TSS) Support following a re-evaluation by the FAA of the proposals by Adacel and the unsuccessful tenderer (who previously held the contract).
This means that the small cap ASX share will continue to deliver under the contract terms which began on 1 December 2023. This contract is valued at US$59 million over five years and includes both the maintenance and support of the TSS hardware as well as a full-scale technical refresh for all major components.
In addition, it highlights that management has reaffirmed its earnings guidance for FY 2025. It is guiding to EBITDA of US$4 million to US$5 million, which is consistent with the broker's estimate of US$4.3 million.
Big returns
In light of the above, the broker has reaffirmed its buy rating on the small cap ASX share with an improved price target of 70 cents (from 65 cents).
Based on its current share price of 50.5 cents, this implies potential upside of almost 40% for investors over the next 12 months.
Commenting on its buy rating, the broker said:
On the back of the affirmation of the FAA contract we have increased the multiple we apply in the EV/EBITDA valuation from 7.5x to 8.0x and reduced the WACC we apply in the DCF from 10.5% to 10.1%. The result is an 8% increase in our PT to $0.70 which is >15% premium to the share price so we maintain our BUY recommendation. Potential catalysts include an update at the AGM in November and, as mentioned, some clarity around the timing of the refresh work. The 1HFY25 result in February is also a potential catalyst given the weak 1HFY24 result – so cycling a weak comp – and the increased confidence this result should provide in the full year guidance.
