AB Dynamics (ABDP)

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At the beginning of the year I bought AIM super stock, AB Dynamics and after 5 months it has earned a return of over 50%. This is extremely impressive compared to a return of around 12% for the FTSE AIM 100 and a rise of only 7% for the FTSE 100 for the same period. 
The company’s high growth performance isn’t just in isolation either, with the stock producing over a 357% return since the start of 2017, suggesting that this isn’t just a lucky year or an overhyped valuation by the market. So the question is, can the stock continue to grow? 

WHAT THEY DO

AB Dynamics supply integrated test systems for the automotive industry, with a client list that includes major brands such as BMW, Audi, and Chrysler. The stock is currently listed on the FTSE AIM market, with a market cap of £471 million. 

The testing industry may be an unglamorous part of the automotive industry versus investing in brands such as BMW and Rolls Royce, but it is an important part of the value chain for such brands. With strict legislation in place for car safety requirements, testing is a crucial step in the production process and this is where AB Dynamics come in.
The company has managed to benefit from the fact that it is cheaper to hire their abilities to test electric and self-driving cars than it is to produce internal operations. As such, the company is operating in a space where large players don’t want to enter and would rather hire companies with relevant expertise, such as AB Dynamics. 
The company’s underlying fundamentals continue to look strong with a high operating margin of 21% and a return on capital employed at 20% in 2018. This shows that the company is highly effective in its use of capital, and the profit that it produces from sales is above average fuelling growth. This arguably indicates that strong management is in place to lead the business for future growth, along with an effective business model that is currently dominating its niche market. 

TRENDS FOR GROWTH

AB Dynamics due to its positioning is also set to benefit from trends in both driverless and electric vehicles. For example, electric cars are increasingly in demand due to regulatory pressures from the UK government, with the sales of diesel cars in the UK to be banned in 2040. This has lead to an increase in demand for the testing that AB Dynamics supplies. 

Due to recent success, the company has targeted expansion into new markets, with the firm opening a new office in Germany in 2018 to target continental Europe. The company is therefore well-positioned to tap into growing demand in the EU, with Germany the first EU country to legalise automotive driving vehicles. 

OUTLOOK

I think that with the company’s past performance, strong business fundamentals and its strategy to tap into increasing market demand all provide strong indicators for future growth potential for the stock. As a result, I’m going to hold AB Dynamics for the long term to achieve further returns. 


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