AB Dynamics ready for the fast lane

Two key structural growth trends are driving demand. Firstly, mounting safety regulation. For example, from 2022, all new vehicles sold in the European Union (EU) must be equipped with safety features such as automatic emergency braking. Testing these ‘advanced driver assistance systems’ (ADAS) is already a fast-growing area – revenue from ADAS test products, such as pedestrian dummies, jumped by 44 per cent in the first half, to £13m. In addition, the European New Car Assessment Programme (Euro NCAP) – which independently assesses vehicle safety – plans to introduce further evaluation criteria between now and 2025. As OEMs strive to meet these standards, why not choose the same technology that Euro NCAP itself uses?

Secondly, there is the push towards driverless cars that will need billions of miles of testing in simulators like those provided by AB Dynamics. Amid “increasingly complex testing requirements”, Anthony Cross, manager of the Liontrust UK Smaller Companies Fund, believes “the challenges of bringing autonomous vehicles onto the road should mean that these favourable demand dynamics continue into the foreseeable future”. Mr Cross is not the only leading UK fund manager with a fondness for the shares. Among others, Keith Ashworth-Lord’s top-performing Castlefield Buffettology fund counts AB as a top 10 holding.

Thanks to last year’s £18m purchase of simulation software developer rFpro, AB Dynamics looks well positioned. Offering the industry’s largest digital library of the world’s roads, rFpro’s software licences have helped boost recurring revenue from 10 per cent of total sales, to 25 per cent. This has also been aided by expansion into aftermarket services and the long-term contracts gained through the $25m (£19m) acquisition of Dynamic Research Inc (DRI).

That’s not to say the road ahead isn’t without obstacles. Already weakened by trade war tensions, OEMs are set to curtail spending in light of Covid-19 and a global recession. At the time of its half-year results in April, AB Dynamics’ order intake hadn’t materially reduced, but larger orders for capital equipment had been deferred. With its financial year ending on 31 August, the second-half numbers will reflect coronavirus disruption, although earnings are projected to bounce above pre-pandemic levels in 2021.

AB Dynamics has been sitting on net cash since 2010 with no long- or short-term borrowings. A £50m equity raise at 2,200p last year funded the rFpro and DRI acquisitions and bolstered the balance sheet. With £35m of net cash (excluding lease liabilities) at the end of February – up from £19m a year earlier – this should help it weather a rough patch and pursue further M&A. Still, there was no half-year dividend and most analysts aren’t expecting a final payout either.