AB Dynamics PLC (LON: ABDP) – Trading momentum brings confidence for H1 FY2021 and beyond.

AB Dynamics PLC is an FTSE AIM All-Share Index listed Company founded in 1982 and headquartered in Bradford-on-Avon, the United Kingdom. The Company designs, manufactures, and supplies advanced testing systems and measurement products, catering to the needs of the global automotive market. Geographically, it operates in the United Kingdom, the European Union, North America and the Rest of the World. It is considered to be one of the most trusted global suppliers of products & services for the automotive test and verification sector. Also, the Company provides 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. ABDP’s products are useful to evaluate vehicle dynamics, noise, vibration, and harshness. They could also evaluate the autonomy for a range of applications for conventional vehicles, sports vehicles, and autonomous vehicles.

  (Source: Company presentation)

Recent Trend of dividend payments – ABDP paid an interim dividend of GBX 1.60 per share for H1 FY2021 on 14 May 2021 with an ex-dividend date of 6 May 2021. Previously, the Company had paid a final dividend of GBX 4.40 per share for FY2020.

Growth Prospects and Risk Assessment

• Intact Market Drivers: The Company is presented with a growth opportunity from the change in administration in the US as the Biden administration aggressively promotes environmental protection. Its growth is also fuelled by regulations in the automotive market which are in place. ABDP also gets continued drive from consumer bodies such as Euro-NCAP.
• Positive Trading Momentum: The Company has strengthened its order intake trend and maintained a positive book to bill ratio. The management is confident that this positive momentum would further strengthen and continue in H2 FY2021.
• Continued Investment for Growth: The Company has built a new engineering design centre and is aggressively investing in systems and processes. ABDP is continuously building its senior management team, increasing its efficiency. There are new products in the pipeline.
• International Expansion: Using its direct sales channels and customer intimacy, ABDP is poised for further international expansion. These direct sales channels and customer intimacy would enable increased service and support, improving margins.
• Acquisition of Vadotech Group: ABDP is expected to further realize strong acquisition synergies from Vadotech Group, which was acquired on 4 March 2021. It provides a significant opportunity for growth, especially in the APAC region. Furthermore, this strategic acquisition serves the expansion of capability into on-road testing offerings. Also, ABDP can replicate the Vadotech business model in Europe and the US.
• Products and Innovation: Using its considerable research and innovation, ABDP looks for market-led new product development. As a result, there is always a steady demand for its products.

However, ABDP’s performance could be significantly impacted by several significant risks, such as liquidity risk arising from fluctuating interest and exchange rates. Moreover, the Covid-19 pandemic has disrupted the supply chain and customer procurement. Adverse macroeconomic conditions led to poor business sentiment and consumer confidence, which in turn impacted the automotive market and customer demand. The failure to achieve expected synergies from the Vadotech Group acquisition could impact both revenue and cost. There could be further supply chain disruptions from any further wave of Covid-19 as the Indian variant of the virus is spreading in the UK and worldwide. Additional costs could arise due to Brexit as there are further regulations. ABDP is also exposed to bad debt risk from customers. Overall, these risks could impact the growth trajectory of the Company. 

After understanding growth prospects and risk assessments, we will analyze some key fundamental and shareholders statistics of AB Dynamics PLC.

Recent Development 

4 March 2021: ABDP announced that it had acquired Vadotech Group for total cash of up to EURO 26.0 million. This acquisition would support ABDP’s strategic priorities. 

Financial and Operational Highlights (for the six months ended 28 February 2021 as of 28 April 2021)

(Source: LSE Website)

• Track testing revenue was down 6% as compared to H2 FY2020, driven by Covid-19 disruption to customer testing activities.
• However, following the deferments last year, strong order intake drove laboratory testing and simulation related revenue to surge 38% in H1 FY2021 compared to H2 FY2020.
• It contributed to a positive book to bill ratio and overall top-line growth of ~1.9% compared to H2 FY2020.
• Due to a higher proportion of large capital equipment revenues, which has lower margins, gross margin fell by 60 bps to 57.7% from H2 FY2020 levels.
• The Company has maintained almost zero average debt. Hence, its net finance costs were nil in H1 FY2021.
• Due to a reduced level of activity and strategic investment for long term growth, the operating margin of 12.8% in H1 FY2021 was consistent with the H2 FY2020 margin of 12.2%.
• ABDP delivered a solid operating cash flow of £8 million, driven by its cash accretive operations. It led to a net cash position at H1 FY2021 end of £33.1 million.
• Due to this solid liquidity position, ABDP paid an interim dividend of GBX 1.60 per share for H1 FY2021. 

Financial Ratios (H1 FY21)

Share Price Performance Analysis  

(Research done by Kalkine Group)

On 25 May 2021, at 11:15 AM GMT, ABDPs shares were trading at GBX 2,212.40, up by 1.02% against the previous day closing price. Stock 52-week High and Low were GBX 2,470.00 and GBX 1,530.00, respectively.

On the weekly chart, ABDP's price is trading in a rising wedge formation for the past more than one year and currently, taking the support of the lower band of the pattern that indicates the possibility of the pullback from the lower end. The prices are trading above 50-period SMA and 21-period SMA, acting as crucial support levels on the lower side. The momentum oscillator RSI (14-period) is trading at 53.74 levels, which support our bullish stance on the stock.

In the last three months, ABDP’s stock price has delivered a positive return of ~20.33%; and it has outperformed the FTSE All-Share Automobiles and Parts index with a return of around negative 0.45% and the FTSE AIM All-Share index with a return of about 5.15%.

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

Business Outlook Scenario

ABDP has delivered a decent result for H1 FY2021 with top-line growth of 38% in laboratory testing and simulation, compared to H2 FY2020, driven by strong order intake. This increasing order intake provides further confidence for H2 FY2021 and beyond. The Company has a positive trading momentum, continued investment for growth, potential international expansion, solid market drivers, new innovative products and potential synergy from the strategic acquisition of Vadotech Group going into H2 FY2021. ABDP has almost zero leverage, with a debt/equity ratio of 0.01x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. This will help ABDP to significantly invest in its international expansion, innovation and new product development. The management also strives to achieve further revenue and cost synergies from the Vadotech acquisition, with more acquisitions in the pipeline.

The board expects future growth to be supported by the long term structural and regulatory growth drivers. This growth plan will also meet the market expectations.

On the technical chart, the next important support level is at GBX 1,710.00.

Considering the decent prospects of the Company, its continued international expansion, further synergies from the Vadotech acquisition, decent profitability and leverage profile of the business, its market-led innovative products, 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 2,212.40 (as on 25 May 2021 at 11:15 AM GMT), with lower-double digit upside potential based on 53.77x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*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.

*The reference data in this report has been partly sourced from REFINITIV.

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