AB Dynamics PLC (LON: ABDP) – Continued resilient performance while delivering against strategic priorities.

AB Dynamics PLC is a FTSE AIM 100 index listed Company, which designs, manufactures, and supplies advanced testing systems and measurement products. It supports the automotive sector to improve safety and impact on the environment. Its customers include numerous global test facilities, Tier 1 suppliers, global vehicle manufacturers, and autonomous vehicle developers. The Group has a global presence and diverse geographic end markets.

(Source: Company Website)

Growth Prospects and Risk Assessment

With new offices and establishments, there is a strong potential for geographic growth in the USA and Japan. Moreover, it has launched new products, such as Halo driving robot, aNVH, Guided Soft Target 120 and Radar Cart, which can support the growth trajectory. Through acquired businesses, improved sales support, and increased support contracts, it has been able to grow the recurring revenue to 28%. Furthermore, the construction of the new Engineering Design Centre nearing completion. Even from industry perspectives, long-term, sustainable regulatory and structural growth drivers remained intact. The Group should be able to tap the market opportunities with continued innovation and capability investment. The Group has started exploring the acquisition opportunities to supplement the organic growth.  

However, the Group faces currency exposure on its foreign currency transactions. Moreover, the Covid-19 pandemic has disrupted the supply chain and customer procurement decisions. Also, adverse market conditions have impacted the automotive markets and customer demand. Also, the change in procurement processes could lead to pricing pressure. Furthermore, there are risks associated with the threats of disruptive technology, cybersecurity, and business interruptions.

Industry Outlook Dynamics

According to the recent publication from Grand View Research, the market size of global automotive aftermarket was valued at US$378.4 billion in 2019, and it is expected to grow at a CAGR of ~4% from 2019 to 2027. Therefore, the market is forecasted to reach US$513.8 billion in size by 2027.

The market drivers which can influence the market include the pursuit of automobile drivers in terms of exhaust, speed, appearance; regulatory guidelines; digitalisation of components; rising trend of Internet of Things; and increasing disposable income.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Ab Dynamics Plc.

Recent Developments

On 7 December 2020: ABDP has issued 1,041 bonus shares to directors (James Routh and Sarah Matthews-DeMers) of the Company, which is at a price of 1780 pence. Therefore, the Company's total issued share capital will comprise of 22,585,225 Ordinary Shares.

On 3 December 2020: The Company was awarded options of 39,451 ordinary shares following the rules of the AB Dynamics Long Term Incentive Plan (LTIP).

Key Performance Indicators (FY20)

(Source: Company Website)

A Glimpse of Segment (FY20)

Financial and Operational Highlights (for the year ended 31 August 2020 (FY20), as on 25 November 2020)

(Source: Company Website)

• The Company witnessed a strong balance sheet and resilient business model, with revenue growth of 6% year-on-year (YoY) and improved gross margin. The revenue growth was mainly driven by the > rFpro Limited and Dynamic Research Inc acquisition made during the prior year and made a growth of 19%.
• It delivered a strong first-half performance, with robust growth in ADAS (Advanced Driver Assistance Systems) platforms and testing, and solid geographic growth in the USA and Japan.
• However, organic revenue declined by 13% YoY, due to the deferment of customer procurement decisions and lower order intake in H2 FY20.
• As per the segment, Track testing revenue surged by 4% YoY to £51.8 million and laboratory testing and simulation revenue increased by 18% YoY to £9.7 million. Furthermore, the Company has made a 36% CAGR (2016-2020) in Track testing sales.
• Despite the backdrop, the proportion of recurring revenue surged substantially to 28% of sales, with an increase in longer-term service and support contracts.
• Adjusted operating profit reduced by 12% YoY and EBITDA decreased by 4% YOY, with an adjusted operating margin of 18.4%.
• Adjusted diluted EPS decreased by 22% YoY as a result of the reduction in adjusted operating profit and an increase in the weighted average number of shares following the prior year equity issue.
• Moreover, the adjusted operating cash flow declined by 34% YoY to £6.9 million due to investment in working capital for contracts won towards the end of the year.
• Led by the investment in the new Engineering Design Centre construction project, ROCE (Return on Capital Employed) reduced to 15.2% in 2020 from 19.3% in 2019.
• The Company has a significant cash balance of £31.2 million and has proposed a final dividend per share of 4.4 pence.
• It has successfully launched the new products (including Halo driving robot, aNVH, Guided Soft Target 120 and Radar Cart) and completed the construction of the new Engineering Design Centre.
• Overall, the Company delivered a robust and resilient performance in 2020, with a strong financial position.
• In the first quarter of 2021, the demand has been consistent with the Q4 FY20 exit rate.
• Further, the medium-term outlook for AB Dynamics stays positive.
• Looking ahead, the Company remains confident that demand will recover to pre-crisis growth patterns over the medium term.

Financial Ratios

Share Price Performance

On 12 January 2021 (before the market close, at 8.40 AM GMT), AB Dynamics’s shares were trading at GBX 2,000.00, down by 1.23% against the previous day closing price. Stock 52-week High and Low were 2,360.00 and GBX 855.00, respectively.

From the technical standpoint, 20-day SMA (1,939.50), and 100-day EMA (1,922.38) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past six months, AB Dynamics’s share price has delivered ~36.10% return as compared to the ~27.47% return FTSE AIM 100 index, and a negative ~42.15% return of FTSE All Share Automobiles & Parts index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

During FY20, the Group has delivered a robust and resilient performance against a backdrop of challenging market conditions due to COVID-19. It has adopted effective actions to mitigate the risk of the pandemic. The Group continued to invest in capabilities, business infrastructure, and systems to capitalise on the long-term regulatory and structural growth drivers. During Q1 FY21, the Company witnessed strong demand though the visibility is limited with the recent wave of infection. Nevertheless, ABDP sees significant scope to deliver on strategic priorities with potential acquisition opportunities, further product development, and a strong pipeline. Moreover, the market drivers are compelling for the medium-term, and the Group is sufficiently invested to capitalise on opportunities when levels of demand return. 

Considering a robust balance sheet, resilient business model, solid performance from companies acquired during 2019, strong geographic growth in the USA and Japan, a successful launch of new products, growth in recurring revenue, dividend distribution to shareholders, operational conditions improving towards normal levels, robust financial position, solid liquidity position, higher profitability margins, 36% CAGR in Track testing sales, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on AB Dynamics Plc at the current price of GBX 2,000.00 (as on 12 January 2021, before the market close at 8:40 AM GMT), with lower-double digit upside potential based on 64.31x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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