What is the stock?

Adacel (ADA).

How long have you held the stock?

Since May 2017.

What do you like about it?

Adacel (ADA) is a global provider of simulation and control systems for the civil aviation and defence sectors. Its core products are air traffic control systems and simulation systems. We believe ADA has significant barriers to entry, given it has a large installed base of both Air Traffic Control simulation and Air Traffic Management automation systems. Once these systems are installed, ADA usually provides services to the customer for up to 10 years. Consequently, over the life of a product, ADA continues to provide maintenance and upgrades and therefore receives a recurring revenue stream as well as hardware sales.

How is it better than its competitors?

ADA is the clear market leader in simulation systems, with over 350 of its products installed globally. It is also the market leader in Oceana Air Traffic Management systems. While it is not the market leader in Air Traffic Control, it does have a reasonable market share, as it understands the needs of its customers.

What do you like about its management?

ADA has a history of identifying talent and promoting from within. The current CEO, Gary Pearson joined ADA in 2001 and has a number of roles throughout the business. As such we believe he has a well-rounded understanding of each division of ADA and what is needed to drive additional growth.

What is your target price?

We generally take a three-year view on all our investments.  We feel these types of businesses should trade at around 12x EBITDA through the cycle. Consequently, we see value in ADA up to A$3.51 per share based on current expectations.

At what point would you sell it?

We are strong believers in management delivering on its articulated strategy. If the story changes and does not make strategic sense, we would look to exit the position.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

Initially, ADA subtracted from our portfolio as it announced a deferment of its revenue into FY18. While the market reacted negatively to this announcement given it was a downgrade to FY17, we saw this as an opportunity to top up our position as revenue was not lost but deferred into the next financial year. With any business that has an element of contracted revenue, timing is always an issue, which can create an opportunity.

Where do you see value?

We see value in small businesses that are clearly market leaders in their field and understand the values and needs of their customers. ADA has demonstrated over time its ability to continue capture market share and drive innovation to meet customer requirements. When we see these values in small companies and believe they have the drive, management depth and balance sheet strength, we are happy to back management as growth is never linear.

Source: ASX

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