AB Dynamics Analyst Q&A “£30 million in net cash on the balance sheet” (LON:ABDP)

AB Dynamics plc (LON:ABDP) is the topic of conversation when Zeus Capital’s Research Analyst Robin Byde caught up with DirectorsTalk for an exclusive interview.

Q1: AB Dynamics, you’ve recently initiated coverage on them. Robin, what can you tell us about the group’s background and the sector that they’re in?

A1: They are a market-leading automotive technology testing company. To give a bit of background, in the early days the company tested vehicles suspension systems and vehicles and components for vibration damage, in recent years, their testing equipment and services have been applied to much more sophisticated vehicle systems, for example ADAS systems – Advanced Driver-Assistance Systems.

So, ADAS might be, for example, collision warnings or collision avoidance systems, automatic braking or lane control or parking assistance and increasingly, and more recently, they’re focused on testing to support autonomous driving. As we know, autonomous driving is a very exciting space and the company is involved in developing advanced vehicle driving simulators and the associated software.

Now, most of their revenue is linked to auto manufacturer or OEM R&D budgets so much of their activities supporting medium to long term vehicle development programs, their revenue isn’t as linked to short term consumer demand for cars.

On the investment case, we think this is quite finely balanced at the moment, the positive case for the company, we think the big themes favour the company. So, demand for testing services and equipment for active safety and driver assistance and autonomous driving, we think those should remain healthy on a multi-year view.

The company also has strong and commercially robust relationships with a broad range of customers and they also have £30 million in net cash on the balance sheet which is quite unusual at the moment. So that gives them a lot of flexibility and the option to make further acquisitions to fill any growth gap.

Now, the more negative case, focuses really on the specifics and the near term outlook so the company has reported strong sales of hard equipment in recent years so this is driving and steering robots, suspension measurement machines and, more recently simulators. Now, we think the risk is that these kit sales will be slow to recover, particularly as OEM R&D budgets come onto pressure over the next 12 to 18 months. Also, the company does a lot of testing on the track and, as you can imagine, testing activity on the track is more problematic at the moment and probably will remain so with ongoing COVID-19 restrictions.

On the financials, as I mentioned, the balance sheet is very strong but group margins have come under pressure in the past few quarters with investments in central costs. Those investments are necessary, for example they include a new ERP system so I think they are good for the medium term, but they’re not so good for the near term.

Finally, on the negative side, if you like, AB Dynamics continues to trade at a significant premium to the sector and many peers so it’s currently trading on a 2021 PE of around 35 times, which is full. In terms of I think the catalyst and the next events, we have the full year earnings statement and that is due on the 25th of November and I think at the moment, investors are genuinely not sure what to do. This is clearly a world class company with market leading technology and a true rarity factor, but the valuation is full as I’ve described and I think earnings are likely to be under pressure in 2021.

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