AB Dynamics (LON:ABDP) is one of those rare beasts of AIM – profitable, growing and dividend paying. It is also an innovator, an exporter and, surprisingly for a firm with a market cap of just £50mln, has an international reputation.
Its stock in trade is supplying the test beds used by the research boffins in the automotive industry, and it also has track facility that is able to simulate real road conditions.
The latter, which boasts ‘soft’ cars and plastic pedestrians that can be crashed into, is benefiting from the boom in safety.
The Euro NCAP ratings that used to assess ‘passive’ features such as the effectiveness of seat belts and airbags, now, increasingly, are focused on ‘active’ systems such as collision control and parking assistance.
These features, which used to be limited to the top models, will soon be part of the basic spec of the family saloon.
ABD is one of a small handful of firms globally that has the facilities to test these features out. One of its most impressive innovations is the driving robot.
No, it’s not a mechanically enhanced version of Top Gear’s Stig. What it looks like is a Heath Robinson assortment of drives and pullies that remotely put the car through its paces.
Watching a Ford Focus being thrown around the tarmac, you realise the robot is a hugely sophisticated piece of kit.
“Cars have to be tested in real scenarios. Test drivers don’t have that accuracy,” explains ABD’s managing director Tim Rogers.
Next to him across the boardroom table is chairman, founder and major shareholder Tony Best and the pair are discussing just when we are likely to see the first driverless cars on the road.
“I reckon around 2020,” says Best.
Rogers is not so sure. “There is a huge market for aids that will look make the car look driverless,” he says.
“They will enhance safety and improve the drive. But the era of the car arriving at your door and driving you to the pub is probably a long way off.”
Pity. Whatever eventually occurs, the march of technology in the automotive sector is only going to be a boon for ABD.
Vehicle R&D is huge – it is worth US$100bn annually and has grown by 50% in the last 10 years.
ABD is a mover in this market and its customers include Ford, Toyota, Hyundai and GM.
The prelims last week revealed it is really benefiting from these relationships.
Buoyed by a first big deal from Brazil and the recovery of its traditional markets in Europe and Asia, revenues rose 19% to £16.5mln. Geared to an upturn in its fortunes, operating profits advanced at double the percentage rate to £3.7mln in the 12 months to the end of August.
At the year end, ABD was sitting on a cash pile of almost £8mln, which is the equivalent of around 17% of the firm’s current market capitalisation. The final dividend will be 1.65p, giving a total payout of 2.75p, which means ABD is yielding around 1%.
The broker Cantor Cantor Fitzgerald was forced to revise up its profit forecasts for the current year, along with its price target, which has jumped to 340p a share from 265p.
“The group looks to have entered 2016 with good momentum and no slowdown in activity despite the general backdrop of VW and China, in particular,” said analyst Richard Hickinbotham.
Panmure Gordon’s Sanjay Jha moved his recommendation to ‘buy’ from ‘hold’ on the back last week’s figures, which blew his forecasts out of the water.
He pointed out the stock, even after its advance in the past 10 months, is still only trading on 13 times forward earnings, which is less than the market and at a steep discount to its nearest rival, that stalwart of the mid-caps, Ricardo.
Jha reckons ABD, which he points out has a well-balanced business internationally, will grow quickly as car makers continue to innovate or are forced by legislation to improve safety.
The only possible blot on this picture of commercial serenity is the VW emissions scandal. Will it be a blow or a blessing for ABD?
MD Rogers is blasé about it. “There is always a crisis going on in the auto industry,” he says. The last one was airbags that prompted the recall of 20mln vehicles.
And he points adds if VW struggles then “Toyota might have a great year in the US and it is one of our customers”.
Its recent financial and commercial success has been based on a bedrock of 30 years of hard work that started back in 1982 when Best first set up the company.
“In that time we have cultivated all the major car companies, which has meant long trips to Japan and China,” says the chairman.
The next big challenge is a move into a new headquarters factory facility in Bradford-on-Avon, Wiltshire, which should be up and running in early 2017.
“I would caution people against thinking it is suddenly going to release a huge amount of untapped potential,” Rogers says.
No, but it will hopefully provide a springboard to bigger and better things for this great British success story.