Interactive Investor

Why AIM star AB Dynamics and GKN’s owner went different ways

25th November 2020 15:03

Graeme Evans from interactive investor

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They’re both great companies, but share prices for these two are doing very different things today.

Updates on the car industry's recovery sent shares in track testing firm AB Dynamics (LSE:ABDP) and FTSE 100-listed Melrose Industries (LSE:MRO) heading in different directions today.

Highly-regarded AB Dynamics saw its AIM-traded shares skid 10% after a second wave of Covid-19 infections left it uncertain about the shape and rate of the recovery.

The Wiltshire-based company insists longer-term fundamentals remain positive, as it continues to serve top automotive manufacturers with driving robots for the testing and verification of autonomous vehicles and driver assistance technology.

Shares in GKN Automotive owner Melrose, meanwhile, rose 5.5p to 168.7p after its automotive and powder metallurgy businesses recorded faster-than-expected recoveries in trading in the four months to October. Both divisions have returned to profitability after the Covid-19 shock earlier in the year, with automotive achieving a margin over 6%.

About 50% of the world's new cars feature GKN Automotive's systems and solutions, such as electric drive technology and hybrid transmission. And despite no improvement in conditions in the company's aerospace division, Melrose says it is trading at the top end of its expectations.

Chairman Justin Dowley also believes there's scope for the company's divisions to substantially improve their margins even without a full recovery in end markets.

UBS expects consensus upgrades of close to 25% for 2020 earnings following today's update. Shares were trading at 74p in early April and 85p at the end of July.

The performance of AB Dynamics shares had been one of steady improvement up until today's full-year results, with the stock rising from 1,470p in May to 2,230p yesterday. They had been as high as 2,750p last year after doubling in value in 2019.

Today's 2019/20 figures met City expectations as a strong first half showing was undone by the challenging trading conditions seen in the second half, leading to a 16% fall in adjusted profits to £11 million and earnings per share of 39.9p.

CEO James Routh said demand in the current quarter was consistent with the exit rate seen at the end of the previous financial year, adding that order intake patterns were still difficult to predict, particularly for laboratory testing and simulation.

This prompted analysts at Liberum to scale back their 2021 profits forecast by 17.5%, based on assumptions that annual sales will be flat rather than 10% higher as it previously thought.

The broker, which maintained its ‘buy’ recommendation and raised its target price from 2,100p to 2,300p, said: “We think that the longer term structural growth story is absolutely intact. The shares have had a strong run with the market and we see any weakness as an opportunity to buy.”

AB has been one of the growth stars of AIM in recent years, having floated in May 2013 at a placing price of 86p and valued at £14 million compared with last night's £474 million. Chairman Tony Best, who founded the business in 1982 as an engineering consultancy, still retains a 26% stake in the business.

The company said today it has resumed its acquisition strategy and is actively exploring a number of opportunities. Major deals last year included California-based Dynamic Research, which improved AB's access to the growing US market for driver assistance systems and autonomous vehicle testing. Another major deal was for simulation software developer rFpro, whose blue-chip customer base included Ford, Renault and GM.

AB is also paying dividends again after announcing the award of 4.4p a share with today's results, equal to the total dividend for 2019. It said the payment, which will go into shareholders' accounts on 22 January, reflected confidence in its financial position and prospects.

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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