AIM star AB Dynamics gets cheaper after doubling in 2019

by Graeme Evans from interactive investor |

A great company and hugely profitable investment, this favourite stock is still growing fast.  

Growth investors with an envious eye on the 2019 success of AB Dynamics (LSE:ABDP) will be following the AIM stock closely today after shares in the track testing firm hit a bump in the road.

The Wiltshire-based company, whose products include the driving robots used in the development of self-driving vehicles, has been one of the stand-out performers in the junior market after more than doubling in value at one point this year.

The momentum behind its impressive showing was highlighted by today's full-year results, with revenues up 56% to £58 million and earnings per share 50% higher at 55.4p.

While the figures were in line with expectations after an upgrade to guidance in October, they appear to have presented an opportunity for investors to lock in profits.

The 8% sell-off from last night's record high of 2,850p is also likely to reflect the company's admission that it will continue to invest heavily in the people and systems that have made it such a success story.

There's added nervousness around these spending intentions because AB's key automotive industry customers are in the grips of a sales downturn and may be tempted to cut back on research and development spending.

Source: TradingView Past performance is not a guide to future performance

That said, AB continues to report a healthy order book in long-term growth markets while it boasts a strong reputation in the supply of testing and simulation systems.

Analysts at Cantor Fitzgerald think there's no reason to change their 3,200p price target, although they have trimmed profit forecasts by 5% to reflect some increase in uncertainty.

Today's slide provide another opportunity for investors to jump aboard after shares slid to just above 2,100p in the autumn, only to rally on the back of October's trading update. The stock has risen 80% since we tipped the AIM 100 constituent at the end of last year. 

Cantor's analysis of AB's closest peers show they trade at an average 2020 price/earnings multiple of 15.5x, compared with about 40x for AB Dynamics.

The broker added:

“AB Dynamics clearly trades on a material premium to the sector but generates much high operating margins at about 20% versus 11.5%. Moreover, AB has a strong net cash balance and can deploy this liquidity to accelerate growth.”

AB Dynamics has stepped up its pace of expansion in the past year after a share placing in May raised £48.2 million towards two significant acquisitions.

They included California-based Dynamic Research, which has improved AB's access to the growing US market for driver assistance systems and autonomous vehicle testing. The other deal was for simulation software developer rFpro, whose blue-chip customer base includes Ford, Renault and GM.

These acquisitions mean AB, which is currently building a new facility for product development and simulation, now boasts a 264-strong workforce, compared with 145 a year earlier.

Its growth was recognised at the recent AIM Awards, when founder Tony Best was named entrepreneur of the year and the business was shortlisted for company of the year.

Best, who retains a 26% stake and is still involved with the business, founded AB Dynamics in 1982 as an engineering consultancy. When it floated in May 2013 at a placing price of 86p it was valued at £14 million, compared with last night's valuation of more than £600 million.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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