Advancements In Vehicle Testing Will Drive Future Demand For Safety Solutions

Key Takeaways

• A disciplined M&A strategy focused on high-margin acquisitions is set to boost medium-term earnings growth.
  
• Sustained demand driven by regulatory needs and model launches supports ongoing revenue growth initiatives.
  
• Dependence on acquisitions and market expansion for growth carries integration risks, potentially impacting net margins and financial performance.

Catalysts

Provides vehicle test development and verification products and services for driver assistance systems.

• AB Dynamics has demonstrated a strong track record of improving its operating margins, with a target to expand beyond 20%. This effort in cost control, alongside volume-driven margin improvements, is expected to enhance net margins further.
  
• The company has a strategy to achieve 10% organic revenue growth annually, driven by structural and regulatory growth factors like new model launches and expanding safety standards. This is anticipated to significantly boost future revenue.
  
• AB Dynamics continues to focus on inorganic growth through acquisitions, targeting high gross margin businesses that complement its existing capabilities. This disciplined M&A strategy is designed to be EPS accretive in the medium term, boosting earnings growth.
  
• The increasing complexity of vehicle testing, driven by regulatory requirements and new model launches, suggests sustained demand for AB Dynamics’ products and services, which is likely to support ongoing revenue growth.
  
• ABD Solutions, the company's technology accelerator, has already secured significant contracts and has potential for follow-on orders. Once commercial traction is gained, this segment may deliver incremental revenue and profit growth, enhancing future earnings.

AB Dynamics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AB Dynamics's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 10.8% in 3 years time.
• Analysts expect earnings to reach £15.2 million (and earnings per share of £0.62) by about April 2028, up from £9.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £20 million in earnings, and the most bearish expecting £8.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.2x on those 2028 earnings, up from 38.4x today. This future PE is greater than the current PE for the GB Auto Components industry at 10.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

AB Dynamics Future Earnings Per Share Growth

Risks

• Rising tax rates and potential for further increases could impact future earnings and EPS, reducing net income growth potential.
  
• Currency fluctuations posing a headwind, though not materially impactful now, could lead to unexpected financial volatility, affecting revenue and profit margins.
  
• Simulation segment's revenue fluctuation and dependency on the timing of large capital item deliveries could impact financial stability, particularly earnings and operating margins.
  
• Dependence on market expansion and acquisition for growth, coupled with integration risks, could lead to integration challenges or financial underperformance, affecting net margins.
  
• Current supply chain rationalization efforts aim to boost margins, but could lead to short-term disruptions or cost challenges, impacting net margins and earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of £22.657 for AB Dynamics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £27.0, and the most bearish reporting a price target of just £16.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £141.3 million, earnings will come to £15.2 million, and it would be trading on a PE ratio of 42.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of £16.15, the analyst price target of £22.66 is 28.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.