The automotive sector is in flux amid a transition to electric and hybrid vehicles as well as developments in assisted driving technology and frequent changes in safety and regulatory standards. That’s good news for UK engineering champion AB Dynamics (ABDP:AIM) which is one of the best performing AIM companies of the last decade.

If you invested £1,000 when the company floated in May 2013, you would be sitting on a stake worth £16,000 today, less any transaction or investment platform fees. That same £1,000 invested in a FTSE 100 tracker would be worth just £1,450, with both calculations based on total return data from SharePad.

Before the pandemic the returns on a long-term investment in AB Dynamics shares would have looked even more impressive. Supply chain issues affecting the wider industry hit the company’s profit, and the current share price of £16.11 compares with peaks above £27 in 2019.

That pullback in the share price might interest investors looking for a better entry point into this unique business on the UK stock market.

WHAT DOES AB DYNAMICS DO?

Founded more than four decades ago by Anthony Best, who served as chairman until 2021, AB Dynamics provides testing systems to the automotive industry from its Wiltshire base.

Customers include the 25 largest automotive manufacturers, key tier-one suppliers (the businesses which provide the components and devices used in the manufacture of cars) and large technology companies. It even counts the Alfa Romeo Formula One team among its clients.

These companies use AB Dynamics’ products for vehicle testing; ADAS (advanced driver assistance systems) development; driverless car technology evaluation; suspension, chassis and steering system development; and noise, vibration and harshness testing.

Its products and services include advanced driving simulators, driving robots and precision soft targets – effectively inflatable to-scale cars, motorbikes and other road users – for track testing.

‘With eight mandatory ADAS features required in all cars sold worldwide by May 2024, and a push towards autonomous vehicles that require extensive reliance on simulators and laboratory testing to optimise development, we believe that AB Dynamics’ premium positioning will enable it to benefit from strong demand tailwinds,’ says investment bank Berenberg.

Despite pressure on profitability resulting from the pandemic, a supply chain squeeze and investment in new ventures, AB Dynamics still generates strong returns with an operating margin of 15.8% in the year to 31 August 2022.

BRANCHING OUT INTO NEW FIELDS

While there is no suggestion AB Dynamics sees a lack of longer-term opportunities in its core automotive sector, the company has begun to diversify. Its newly launched ABD Solutions business offers easy-to-install, retrofit kit which can transform a standard vehicle to an autonomous one.

Recognising that widespread adoption of automated vehicles for road-use remains some     way off, it is targeting the mining, defence and specialist industrial sectors. Its solution could, in theory, help rapidly and cheaply reduce costs and safety risks in these industries.

Chief executive James Routh acknowledges to Shares it will take time to build scale in this new division which is currently guided to make a positive contribution to earnings in the financial year ending August 2024.

Routh says: ‘We’re not guiding for huge things straight away. In mining and defence applications which are safety critical there is a lot of emphasis on getting it right and that’s going to take longer as a result, whereas we should be able to convert specialist vehicles on waste management sites a lot quicker, but these are smaller contracts.’

Meanwhile, regulatory changes are providing support to the core business. The European New Car Assessment Programme recently published its 2030 roadmap. As Liberum analyst Sanjay Vidyarthi observes: ‘The test scenarios continue to get more complex, requiring new permutations such as changing weather conditions, different types of vulnerable road user (e-scooters) and, increasingly, the interaction between the driver and ADAS features.

‘We think this will play into AB Dynamics’ suite of simulation and track testing products, a point supported by the fact that all of its ADAS test platforms and targets have now been approved for use in Euro NCAP testing ahead of the introduction of the new 2023 protocols,’ adds Vidyarthi. This has significance outside the continent itself as Europe often leads the way on safety standards.

HOW EXPENSIVE ARE THE SHARES?

Companies with regulatory-driven business are often rewarded with bumper equity valuations and AB Dynamics is no exception, trading on 32 times forecast earnings for the 12 months to 31 August 2023.

In the short term this might make an investment in the stock more of a risky proposition but longer term the growth prospects look excellent and it is a well-run business with an impressive track record.

AB Dynamics has a very strong balance sheet with net cash of £29.3 million. Cash flow generated from operations has increased from £2.1 million in the 12 months to 31 August 2013 to more than
£20 million in the last financial year.

Self-funded acquisitions to supplement organic growth seem plausible. Routh says the company is debt averse, with its financial strength offering reassurance to its customer base. The company pays a modest dividend, but the yield is nominal at best at around 0.3% based on consensus forecasts.

‹ Previous2023-01-12Next ›