For those unfamiliar with the story, AB Dynamics (ABDP:AIM) is a leading provider of development, test and verification solutions to the global automotive market. The business was founded in Bradford-on-Avon in 1982 by Tony Best, who remains the company’s largest shareholder.
The company’s proprietary services help manufacturers develop vehicles which are safer, more efficient and more sustainable.
The shares had a flying start to life as a publicly traded company, rising from 86p at the IPO (initial public offering) in 2013 to £26 by late 2019.
These gains were supported by impressive growth in the business, with revenue and operating profit rising almost five-fold between 2013 and 2019.
The problem was investors got too far over their skis, as usual, pushing the PE (price to earnings) ratio to a nose-bleeding 50 times, so it’s not surprising the stock has trodden water since 2019 trading in a broad range between £10 and £25.
While the shares may have drifted, the business has certainly not gone sideways: sales have more than doubled and EPS have risen 76%, while new management has made the business more resilient and diversified by introducing more revenue lines.
All of which means the company has grown into its valuation, and today the shares trade on a more reasonable 24 times estimated August 2025 EPS, falling to 22 times estimated 2026 earnings of 82.6p per share.
Meanwhile, over the last year analysts have been busy revising up their earnings estimates for 2025 and 2026 by 15% and 18% respectively, according to Refinitiv data, reflecting strong momentum across the business.
We believe it’s only a matter of time before the shares regain their former glory, but this time around from a more reasonable valuation base supported by the next phase of the company’s growth trajectory.
A HIGH-QUALITY GROWTH COMPANY
AB Dynamics possesses some attractive attributes, not least a leading position in a growing market driven by increased regulation and the transition to electrification.
To give just a flavour of the growing regulatory demands, the number of Euro NCAP (European New Car Assessment Programme) tests is expected to increase from 450 today to around 1,000 by 2030.
More complexity will drive demand for the company’s products and services together with incremental use of simulation across new geographies and vehicle categories.
Speed to market and cost efficiencies offered by simulation will drive adoption of the company’s range of services.
The company has built a diverse customer base and high-quality relationships, and the emergence of EVs (electric vehicles) is driving demand for additional development, testing and validation.
After investing for many years, the group now has a scalable platform which means it can drive higher margins through operating leverage as well as benefiting from improvements in the supply chain.
Management has increased the proportion of recurring revenue to 45% from just 8% four years ago, providing greater stability and visibility, while the business throws off lots of cash which means it can deliver shareholder value by investing in organic growth, making acquisitions or returning capital.
Management’s priorities are to invest in innovation to grow the core business, invest in ADB Solutions, make ‘bolt-on’ acquisitions and finally to return capital to shareholders via a progressive dividend policy.
To put some numbers to the capital allocation policy, free cash flow per share has grown by 35% per year since 2019 while dividends have grown by 12% per year and there is plenty of scope to increase the payout given it is covered more than eight times by earnings.
HOW IS THE BUSINESS PERFORMING?
In 2024, revenue increased by a tenth and adjusted operating profit rose by 22% to £20.3 million, meaning the operating margin on sales increased by 1.7% to 18.2% reflecting positive operating leverage and efficiency gains (positive operating leverage is the effect on profit of costs rising less than revenue).
The business achieved 115% cash conversion, in line with the three-year average, allowing it to maintain a net cash pile of around £30 million despite investing £4.8 million in the business, spending £17 million on acquisitions and paying out £1.5 million to shareholders in dividends.
The company says trading so far in the financial year to August 2025 has been strong and it expects adjusted operating profit to be slightly ahead of consensus, which it estimates to be £21.5 million.
In the medium term, the company is targeting 10% organic revenue growth and further margin expansion to 20%.
In summary, we believe AB Dynamics has been working hard under the bonnet to position the business advantageously to exploit strong industry tailwinds and increase shareholder value.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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