AB Dynamic’s (ABD) shares have risen tenfold since its 2013 AIM admission, fuelled by an impressive 19% organic revenue CAGR. The company is investing in a platform to sustain this performance. In the last 18 months it has opened new facilities, bolstered in-country customer support, reshaped its management structure and raised capital. The final part of this plan, a new CEO, is expected to take the helm in the summer. He, or she, looks set to inherit a business in great shape and enjoying long-term growth drivers. ABD’s investment should help it to capitalise on these trends and sustain its impressive growth.
Over the last 18 months, ABD has sought to lay the foundations for another decade of double digit growth. The most tangible evidence of its investment is its new headquarters. Opened in 2017, this state-of-the-art structure provides both a delightful working environment for employees (helping it to attract the best talent) and an impressive facility for customers. ABD is also investing operationally. Headcount has risen 36% in the last year as it grows R&D and establishes in-country support for customers. Recent board appointees and a new CEO aim to create a management structure capable of supporting a significantly larger business.
Industry wide initiatives to improve car safety and develop autonomous vehicles are spurring carmakers to invest in ADAS (Advanced Driver Assistance Systems). These features need to be tested and this is boosting ABD’s growth. In just four years GSTs (Guided Soft Targets) have become a significant product line and the trend towards increasingly complex testing scenarios should sustain this growth. ADAS adoption should also help spur demand for ABD’s driving simulator (aVDS or Advanced Vehicle Driving Simulator). By enabling carmakers to virtually test in a range of lighting and driving conditions, aVDS helps cut ADAS development time.
Even factoring in conservative assumptions, we see ABD sustaining an impressive 19% average annual revenue growth between FY17 and FY20E. Rising opex is likely to restrict adj. EBIT margins to 24% but adjusted EPS should still rise by nearly 60% over the period and, as capex falls, cash generation should steadily improve.
This note sets out the long term investment case for ABD, focusing on understanding the benefits which should be derived from its current strategy and how long term trends in the automotive R&D should sustain its rapid growth.