AB Dynamics expands capabilities and market catchment

Trading conditions for AB Dynamics (ABPD) have not been ideal over the past 12-months. The automotive industry was an early casualty as economic activity slowed once the initial lockdowns were put in place, hardly a positive scenario for a specialist in industry testing technologies.

The fear was that consumer confidence would soften appreciably, thereby undermining industry sales and profitability. In turn, automakers would be forced to shore up their balance sheets, diverting capital away from research and development initiatives and long-term planning projects.

All of this played out to varying degrees, but against this backdrop AB Dynamics has chosen to broaden its capabilities, while securing a new conduit into the vast Chinese, German and Japanese markets through the recent €26m (£22.6m) deal to acquire Vadotech Group. The incorporation of the Singapore-based business will provide further expertise in strategically vital testing areas such as autonomous systems, infotainment, connectivity, electric vehicle performance and charging.

AB Dynamics must constantly upgrade its testing procedures, as the markets it serves are in a constant state of renewal. So sitting still amid the pandemic probably was not an option, even though demand for its testing services and products slumped in the second half of the previous financial year due to widespread disruption to both motor sport and track testing activities of its customers.

The group has not been subject to unduly adverse impacts on its supply chain or manufacturing facilities, although some customers initially deferred many larger capital equipment orders. Risks remain, however, not only due to uncertainties over how long the virus will continue to disrupt the economy, but also over currency headwinds and the potential for Brexit-related logistics disruption. While the group delivered strong operating cash flow in the period under review, the difficulties being experienced by its customers could result in an extension of the cash collection cycle.

House broker Peel Hunt is looking at FY2021 revenue of £66.6m, rising to £86m by 2023. It has also increased its target price from 2,250p to 2,800p a share.

The shares moved backwards on results day, even though the hit to revenue was in line with market expectations. However, margins came under pressure due to an increased preponderance of large capital equipment revenues. Yet we think this is likely to be a temporary effect. Full-year guidance is unchanged but, more importantly, the group’s commercial offering is still supported by long-term structural and regulatory growth drivers in active safety and autonomous systems. The shares, although certainly priced for growth, still offer medium-term upside. Buy.