AB Dynamics PLC (LON: ABDP)

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 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.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by ABDP from FY2017 to FY2020. In FY2021, ABDP paid an interim dividend of GBX 1.60 per share. It was paid on 14 May 2021 and had an ex-dividend date of 6 May 2021.

The UK Manufacturing Purchasing Managers Index (PMI)

In the latest release on 23 July 2021, the UK Purchasing Managers Index (PMI) for manufacturing had a reading of 60.4, which indicates expansion in the sector. Hence, ABDP could use this positive momentum to drive its growth.

Growth Prospects

• End-market growth prospects: There are increasing demands for automobiles in tier 2 and tier 3 cities, driven by urbanisation, rising per capita income, and availability of credit systems. The major OEMs are investing heavily in research and development to produce more technologically advanced vehicles. Hence, the bright prospects of its end markets are expected to drive the growth of ABDP.
• Continued investment in capability and capacity: The Company has built a new engineering design centre and aggressively invests in systems and processes. ABDP is continuously building its senior management team, increasing its efficiency. Also, there are new products in the pipeline.
• Products and Innovation: Using its considerable research and innovation, ABDP strives for market-led new product development. Hence, there is always a steady demand for its products.
• Acquisition of Vadotech Group: ABDP is expected to further realise 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.
• Increasing global footprint: Using its direct sales channels and customer intimacy, ABDP is poised for a more global footprint. These direct sales channels and customer intimacy would enable increased service and support, improving margins.

Key Risks 

• Supply chain risk: There could be delays in the supply chain due to more complicated customs and excise arrangements. It could also reduce profitability both in the short and long term. Brexit related logistics disruptions could add to these issues.
• Failure to achieve desired synergies: Any failure to achieve expected synergies from the Vadotech Group acquisition could impact both revenue and cost for ABDP.
• Increasing health-consciousness of automotive customers: Worldwide, automotive customers are becoming more and more health-conscious. Hence, any failure to promote solutions, which are increasingly environmentally friendly, could affect the top line of the Company.
• Changes in consumer spending levels: Muted disposable income and lower consumer confidence could lead to a drastic change in consumer spending levels, affecting demand for automobiles, which in turn could affect the prospects of ABDP.
• Financial risks: ABDP is exposed to several financial risks such as bad debt risk from its customers as well as liquidity risk arising from fluctuating interest and foreign exchange rates.
  

Now we will analyse some key fundamental and shareholders statistics of AB Dynamics PLC.

Recent Development 

Change in Director: On 1 July 2021, the Company announced that due to health reasons, Tony Best would step down from the non-executive Chairman role, and on his return, would be appointed as a Special Advisor to the Board. Richard Elsy would succeed him as a Non-Executive Director of the Group.

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

(Source: LSE Website)

• Driven by Covid-19 disruption to customer testing activities, track testing revenue declined 6% as compared to H2 FY2020.
• 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 of £33.1 million at H1 FY2021.

Financial Ratios (H1 FY2021) 

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 27 July 2021, at 7:05 AM GMT, ABDP’s shares were trading at GBX 1,960.00, at par against the previous day closing price. Stock 52-week High and Low were GBX 2,470.00 and GBX 1,655.00, respectively.

On a daily chart, the momentum indicator RSI (14-period) is trading at ~33.87 level and moving towards the oversold zone, indicating the possibility of an upward movement. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last five years, ABDP’s stock has delivered an excellent positive return of ~322.12%. Also, it has outperformed the FTSE AIM All-Share Automobiles and Parts index with a return of around 23.34% and the FTSE AIM All-Share index with a return of about 65.30%.

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

Business Outlook Scenario

ABDP delivered a resilient performance in H1 FY2021, with adjusted operating margin rising to 12.8% from 12.2% in FY2020. It had an improved order intake compared to H2 FY2020 with a positive book to bill ratio, which provides further confidence for 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 Company could benefit from its end-market growth prospects, continued investment in capability and capacity, the launch of new products and market-led innovation, acquisition of Vadotech Group and increasing global footprint going into H2 FY2021. The Company has a promising acquisition pipeline, which could drive further growth. Furthermore, long term structural and regulatory growth drivers in active safety and autonomous systems could enhance future growth prospects.

Considering the Company’s market-led innovation and product development, its increasingly global footprint & continued investments, the better profitability, liquidity and leverage position of the business than the industry, 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 1,960.00 (as on 27 July 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 51.27x 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.

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

*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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