Farewell to Adacel

It's a red flag when a company loses a senior officer, so for Adacel to lose two in one day is a worry - particularly given its track record of disappointments.

Gary Pearson has resigned as chief executive, a position he has held since 2015, and will leave the company on 31 March. At the same time, Peter Landos, the chief operating officer of Thorney Investment Group which owns 33% of the company's shares, will step down as non-executive chairman, although he will remain on the board.

Time constraints were cited as the reason for Landos's departure - which seems fair - although none were given for Pearson's. Most likely there's been some disagreement, because he's been sent packing with no-one to replace him.

The board is only now commencing a search for a replacement. In the meantime the company will be run by an executive committee comprising Daniel Verret, the new chief financial officer who joined last year, Kevin Pickett, vice-president of operations who joined Adacel in 2010, and Brian Hennessey, vice-president of business development, who's been with the company since 1997.

More bad news

The abrupt circumstances of Pearson's departure increase the chances of more bad news coming out in the short term. Of course it, it's possible that the board's patience has worn thin, but there's likely to have been some kind of final straw. The chances of an imminent improvement in performance have also faded.

Assuming the board has come to that realisation, then a change at the top makes sense. It's worrying, though, that none of the company's other executives are considered capable of taking the CEO role even on an interim basis, and we're uncomfortable with things being run by a committee even if it's only for a few months.

The company does at least have a ready replacement for chairman, in Michael McConnell. These days McConnell is a private investor and director of several US-based technology companies, as well as Adacel. Over the years he's been on the board of over a dozen companies, including several listed on the ASX - Ansell (in 2004-5), Redflex (2011-14) and Spicers (2011-12).

The presence of Redflex on that list is somewhat disconcerting, particularly as the dates coincide with the announcement of bribery allegations relating to the company's City of Chicago speed camera contract (over payments made between 2002 and 2012). However, McConnell was given the interim chairmanship in the board ructions that followed those revelations, and so was presumably untainted by them.

Skin in the game

Between 1994 and 2007, McConnell was managing director of Shamrock Capital Advisers (a value-based investor in the media, entertainment and communications industries), where amongst other things he managed an 'Activist Value Fund'.

So he can probably be relied upon to be pragmatic - especially after spending $95,000 on Adacel shares at an average price of 69 cents last November, taking his holding to around 288,000 shares currently worth about $200,000. It's small change compared to the $18m worth owned by Thorney, but it's good to see the new chairman with some skin in the game. Founder Silvio Salom, also on the board, still has $4m on the line after selling a third of his holding in 2017. So the board has plenty of reason to extract some value from the company one way or another. Buying back shares is one way they might do this, and the company was at it again yesterday, with 50,000 shares purchased at an average of 71.8 cents.

Another obvious way of recovering some value would be by seeking a takeover, and it may be easier for McConnell to achieve that with his contacts in the US and from his base in Los Angeles. There has been interest before, with the company granting exclusivity to a suitor (thought to be Lockheed Martin) in 2010 when its share price was at 45 cents.

We're not ones to hang on for a takeover, though, as we have no special skill at predicting them. The chances of a deal will no doubt have been incorporated into the share price - indeed that's probably what limited the fall to just 10% yesterday.

Long grind

In the absence of a takeover, then it looks like being a long grind for shareholders. First the company needs to find a new boss, then he or she will need to formulate a strategy (and perhaps throw the kitchen sink at the company's accounts) and then put it into action. Given the various warnings and upheavals over the past couple of years, all that will take place in the face of cultural instability and with morale at a low ebb.

Assuming the company makes the 6.4 cents of earnings per share implied by guidance, then it's priced on a price-earnings ratio of about 11. That looks cheap, particularly, as we noted in our review of the interim result, as the current year should set a low bar for earnings. However, that bar has just got higher and, with the red flags waving harder, it's time to pull the pin.

Only some speculative recommendations work out of course, but this has been a particularly painful failure. The stock is down 69% since we first upgraded, although it's a little higher than at the time of the interim result. SELL.

Disclosure: The author owns shares in Adacel Technologies and plans to sell once members have had an opportunity to do so.