AB Dynamics drives operating cashflows

AB Dynamics (ABDP) delivered double-digit increases across a range of profitability metrics for FY 2022, although the market response was muted as the auto testing specialist released a pre-close update in September.

The company’s shares have been on a rollercoaster ride over the past five years, a period in which the industry that AB Dynamics serves has been a state of flux. Carmakers are still facing regulatory and supply chain issues, but the company closed out its financial year with record order intake and cash profits. Performance was enhanced by a recovery of sales to China and a full year's contribution from the acquisition of VadoTech, a leading supplier of testing services in the Asia Pacific region. The subsidiary, acquired in March 2021, contributed to a 30 per cent increase in track testing revenue.

Look under the hood and it's clear that the rebound in fortunes has been partly predicated by operational improvements, not least of all measures designed to mitigate inflationary cost pressures and bolster supply chain channels. The efficiency drive is reflected in a 29 per cent increase in operating cashflow to £20.7mn, a robust cash conversion rate, and an 11 per cent fall in trade/receivables.

Statutory operating profit was up by one-quarter to £5.2mn, but the adjusted underlying margin came under pressure due to investment in ABD Solutions, as the Wiltshire-based company looks to exploit long-term structural drivers such as the roll-out of EV/hybrid autos.

AB Dynamics now trades at 32 times Peel Hunt’s adjusted EPS estimate on a fully diluted basis. That may be a little rich for some tastes, but the shares are still down by around a fifth on the consensus target and, above all, we share the view of McKinsey & Co that “the automotive revenue pool will significantly increase” through to 2030. Buy.

Last IC view: Buy, 1,414p, 27 Apr 2022