Adacel: Interim result 2019

After it was delayed by a week, we were approaching Adacel's interim result with some trepidation. But when it eventually arrived, the reason for the delay was immediately apparent and relatively mundane.

The company has been wrestling with the new accounting standard AASB 15, which changes the timing of when companies register revenue from contracts, as they meet their own performance obligations. It won't have helped that the company had a new chief financial officer, Daniel Verrett, join in October.

For a company like Adacel AASB 15 has far-reaching implications for the period-to-period reporting of revenue, but the long-term valuation impact is precisely zero - ultimately cash comes in, and cash goes out.

Of course companies need to be on top of their numbers, but we also want them to keep costs low and to devote manpower to chasing business opportunities - and at least they got there in the end.

There was added confusion from the fact that last November's guidance for full-year profit before tax (PBT) to fall 25-35% was given in pre-AASB 15 numbers, so the guidance numbers needed to be presented in old and new formats.

The disappointing part (and why the stock has fallen 8% today) is that after unscrambling it all, the company now expects full-year PBT (pre-AASB15) to be down 35-45% on 2018. In post-AASB15 terms that translates to a fall of 21-32%.

Shutdown slippage

The company actually met its first-half guidance (as it should have done since it was given so recently). So the problems are limited to the second half, and the main one was the US government shutdown. That caused a direct revenue slippage of $0.3m on one contract, but more significantly created a backlog in contract awards, causing further delayed revenue recognition. On top of that, the company singled out a delay to an air traffic management contract in Martinique.

Due to the ongoing legal stoush surrounding the lost US Federal Aviation Authority tower simulation support contract, management had nothing to add on the matter - except to confirm that the disputed contract had been re-awarded to Adsync.

Management highlighted a number of contract wins, such as the US Air Force tower simulation support contract, but it wasn't enough to lift what was another disappointing announcement from a company that has already sent up its share of red flags.

However, the new guidance implies the company should make around 6.4 cents of earnings per share for the full year, which puts the stock on a price-earnings ratio of 11. That looks cheap, particularly as the current year should set a low bar for earnings. HOLD.

Disclosure: The author owns shares in Adacel.