Analyst Sanjay Jha at house broker Panmure Gordon believes that the outperformance has been driven primarily by the company's track testing systems division, which includes driving robots and soft crash vehicles and accounts for 70 per cent of revenues. This unit has higher margins than laboratory testing and explains why AB Dynamics' gross margins are expected to have risen by three percentage points to 32 per cent in the latest 12-month trading period.
Moreover, with revenues now expected to have increased by 10 per cent to £15.2m, rather than by 4 per cent as previously forecast, the combination of rising turnover and margins has sent underlying pre-tax profit estimates soaring. Panmure now expects fiscal 2015 EPS to have risen by 31 per cent to 15.9p, representing a 30 per cent upgrade, and is based on a surge in pre-tax profits from £2.7m to £3.4m.
Forecasts for the 2016 and 2017 fiscal year have also been upgraded too, reflecting a continuation of the double-digit revenue growth in track testing and additional improvements in gross margin. Panmure is pencilling in revenues of £16.9m and pre-tax profits of £4.1m in the 12 months to end August 2016 to produce EPS of 18.8p. These estimates look well underpinned. I understand from managing director Tim Rogers that his company has a strong order book going into the new fiscal year and this includes recent orders for the laboratory testing division, according to Mr Jha of Panmure. Of the £1.7m revenue growth expected in fiscal 2016, around £1.07m is forecast to come from track testing with the balance from the laboratory testing unit.
On this basis, AB Dynamics' shares are being rated on 14 times current year earnings estimates and offer a prospective dividend yield of 1.25 per cent based on the pay-out being hiked from 2.8p to 3.3p a share. But it's worth noting that the company also has net funds of around £7.55m on its balance sheet, up from £4.9m at the end of August 2014, and a sum worth 44p a share. This means that the forward PE ratio is around 11.7 net of the current cash pile, not a punchy rating in my view for what is clearly a fast growing UK success story.
Sound prospects
Furthermore, with cash generation robust, the order book strong, and profits rising faster than revenues, the board have decided to fund the £7m cost of a new facility from the company's own resources rather than take up the offer of a burdensome government grant worth £2.3m. Construction of the facility should start in the first quarter next year and complete in the second quarter of 2017. It's a sensible decision as analyst models suggest that AB Dynamics will still have net funds of £3.9m on its balance sheet by the end of the 2017 fiscal year, so the company can afford to both fund its normal operations and carry out capital spending plans in order to scale up capacity in the business.
In the circumstances, it's hardly surprising that investors have reacted warmly to the massive earnings beat, pushing up AB Dynamics' shares to an all-time high (bid-offer spread of 264p to 267p), representing a 53 per cent uplift on the 173p recommended buy-in price in my 2015 Bargain Shares Portfolio, and 14 per cent ahead of the price at the time of my last update ('Bargain shares updates', 16 June 2015). The share price has also hit Panmure Gordon's upgraded target price of 264p.
But I am not ready to bank profits just yet as I feel that the company remains very well placed to profit from the increased regulations within the automotive industry, and I wouldn't be surprised at all if the positive earnings momentum we are seeing leads to further upgrades as the new financial year unfolds.
So ahead of the full-year results on Thursday, 12 November, and a release which will likely include another positive trading update, I would recommend running your bumper profits.
Please note that I have written four articles today and links to the others are included in the list of my articles below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, target 130p ('Secured growth for re-rating', 13 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
