AB Dynamics PLC (LON: ABDP) – Strong growth in ADAS (“Advanced Driver Assistance Systems”) platforms.

AB Dynamics PLC is an FTSE AIM 100 index listed Company, which designs, manufactures, and supplies advanced testing systems and measurement products catering to the needs of the global automotive market. Moreover, it is one of the most trusted global suppliers of products & services for the automotive test and verification sector. Furthermore, the Company provide solutions to assist the automotive sector in enhancing safety and create a positive impact on the environment. Its customers include numerous global test facilities, Tier 1 suppliers, global vehicle manufacturers, and autonomous vehicle developers. The Company has two broader business segments – Track testing and Laboratory testing & simulation. Overall, the Group has a global presence and diverse geographic end markets.

(Source: Company report)

Recent Trend of Dividend Payments

The Company had paid a total final dividend of 4.40 pence per share with respect to FY20 on 22 January 2021. The ex-dividend date was 07 January 2021.

Growth Prospects and Risk Assessment

The Group would identify and grab the market opportunities with continued innovation and capability investment. ABDP has started exploring acquisition opportunities to supplement organic growth. Moreover, ABDP is on the verge of completion of the new Engineering Design Centre near Bradford-on-Avon. Meanwhile, ABDP has accelerated the progress of the simulation sector with new products, including Static Simulator, Data Farming, Linux OS version and highly accurate digital twins. The Company would continue to increase investment towards new product development as it received an order for the new axle Noise Vibration and Harshness (aNVH) testing machine expected to be delivered by early 2021.

(Source: Company presentation)

ABDP has the leading position in track testing products driven by superior product quality and technology differentiation. However, the Company has a relatively small share in the simulator market.

However, there are certain potential risks that can impact the business, such as downturn or instability in major geographic markets, failure to deliver new products, dependence on external routes to market, foreign currency fluctuation, acquisition integration & performance. Moreover, Intellectual property theft or infringement may adversely impact product sales. The Group is also exposed to bad debt risk from customers.

Industry Outlook Dynamics

According to the latest report from Markets and Markets, the market size of the global automotive test equipment industry was estimated to be approximately USD 3.0 billion during 2020. Moreover, the industry is expected to grow at a CAGR of around 4.1% from 2020 to 2025. Furthermore, the rising demand for safety and comfort features would be key factors driving the industry.

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

Recent Developments

On 23 February 2021: The Company stated that Tony Best, as a Non-executive Chairman, has taken a leave of absence due to ill health. In Tony Best's absence, Dick Elsy (Non-executive Director) has taken the Chairman's duties'.

A Glimpse of Segments (FY20)

Key Performance Indicators (FY20)

(Source: Company Website)

AGM Trading Update (as on 13 January 2021)

• In the first four months of the current year, the demand was line with the Q4 FY20 exit rate.
• It also made good progress in the execution of its strategy.
• ABDP witnessed a strong balance sheet, with cash of £33.9 million at 31 December 2020.
• 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 and Operational Highlights (for the year ended 31 August 2020 (FY20), as on 25 November 2020)

(Source: Company Website)

• AB Dynamics 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.
• It has shown a resilient business model and strong balance sheet, with revenue growth of 6% YoY and improved gross margin.
• However, organic revenue declined by 13% YoY, due to the deferment of customer procurement decisions and lower order intake in H2 FY20.
• Despite the backdrop, the proportion of recurring revenue surged substantially to 28% of sales, with an increase in longer-term service and support contracts.
• 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.
• 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.
• 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.
• The Company has a significant cash balance of £31.2 million and has proposed a final dividend per share of 4.4 pence.

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 23 March 2021, at the time of writing (before the market close, at 11:30 AM GMT), AB Dynamics PLC shares were trading at GBX 2,059.80, down by 0.01% against the previous day closing price. Stock 52-week High was GBX 2,300.00, and Low was GBX 900.00, respectively.

From a technical standpoint, 200-day SMA (GBX 1,917.18) and 200-day EMA (GBX 1,957.89) support an upside potential.

In the last two years, AB Dynamics PLC’s stock price has delivered a return of ~28.58% as compared to ~26.54% return of the FTSE AIM 100 index and a negative ~23.70% return of the FTSE All-Share Automobiles & Parts index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company had delivered resilient financial performance on the expected lines during the first half of FY21. During FY20, the Group has delivered a robust and resilient performance despite challenging market conditions created by the COVID-19 pandemic. It has adopted practical 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.

Nonetheless, ABDP sees significant scope to deliver on strategic priorities with potential acquisition opportunities, further product development, and a robust pipeline. The acquisition of Vadotech Group would support ABDP’s strategic priorities as it widened the scope of product and services offering. Moreover, the market drivers are compelling for the medium-term, and the Group is well-positioned to invest and capitalise on the opportunities when levels of demand return. Overall, ABDP is witnessing a remarkable recovery in customer testing operations from the widespread disruptions created by the Covid-19 pandemic.

(Source: Company presentation)

Considering a 36% CAGR in Track testing sales, 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, solid liquidity position, higher profitability margins, paying dividends to shareholders, 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 2,059.80 (as on 23 March 2021, before the market close at 11:30 AM GMT), with lower-double digit upside potential based on 8.00x EV/NTM Sales (approx.) on FY21E sales (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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