A microcap the global auto giants can’t go without
By Aimee Jordan, Analyst, Spheria Global Microcap Fund
Autonomous and advanced driver assistance solutions have revolutionised the driving experience and are tackling road safety head on.
Over many years, automakers and technology companies have made significant progress when it comes to road safety – it’s hard to imagine modern vehicles without some of the first ever vehicle safety features like the humble windscreen wipers, rear vision mirrors and indicators.
The technological innovation in the auto industry has since evolved dramatically to incorporate innovative tech solutions which are now further assisting in making roads safer. Yet, The World Health Organisation estimates that 1.35 million people die each year as a result of road traffic crashes and these casualties cost most countries around 3% of their gross domestic product.
There is still much progress to be made.
Testing the future of driving
The total addressable market for advanced driver assistance solutions is expected to grow from $27 billion today, to $83 billion by 2030.
With so much of the 21st century road safety innovation focussed on autonomous vehicles and driver assistance solutions, the requirements for strict testing, analysis and data capture have never been greater.
One company identified through Spheria’s global microcap screening process is a global leader in this field.
UK-based AB Dynamics (LON: ABDP) designs, manufactures and supplies sophisticated testing systems and measurement products for the global automotive market. Its clients include, Tesla, Volkswagen, Toyota, BMW, Ford and GM. In fact, all the world’s 25-largest vehicle manufacturers partner with AB Dynamics when it comes to designing or testing a new assisted vehicle solution.
AB Dynamics’ areas of expertise include simulation, measurement and analytics, as well as on-the-ground robotic track testing. Robotic track testing is an area of growing importance as progress continues to be made in autonomous driving.
ABD’s track testing products and systems are used by all 7 European New Car Assistance Program test centers. When auto-manufacturers seek the European NCAP final tick of approval, it is ABD’s systems grading it a pass or fail.
Thus, ABD’s software and systems have become an integral and indispensable step in the design, simulation and testing process in new vehicle technology.
We think as technology continues to evolve, so too will the demand for ABD’s services as auto makers seek the tick of approval for their newest features.
Unlike the broader automotive sector, exposure to driver assistance and autonomous system companies are less prone to downturns, given the technology is linked to essential R&D – an area that is constantly evolving.
Auto companies recognise the importance of investing significant amounts of capital into R&D, as the safety standards continue to rise. This is compounded by increasing government legislation mandating new vehicles have basic driver assistance features by 2030. The customer base for ABD thus will continue to grow and become even more relevant as legislation propels autonomous features into the limelight.
Making an impact with strong fundamentals
When it comes to ESG and impact investing, many investors have focused on EV’s and decarbonisation stocks. Companies making a safety and social impact can often be overlooked.
AB Dynamics is a central pillar in global road safety innovation. It is a business whose output makes a positive impact on society, whilst also offering investors strong fundamentals.
Most companies with even the slightest ESG angle trade on significant premiums, i.e., Tesla on 360x PE, or, have no earnings i.e. Beyond Meat (US: BYND) and Vulcan Energy (AU: VUL).
AB Dynamics has managed to achieve a strong return on capital (25% over the past three years) whilst maintaining a net cash balance sheet, demonstrating a disciplined and considered approach to investment.
ABD’s constantly evolving products and software suite has rendered them indispensable to the auto-industry. It is no surprise ABD has managed to achieve a healthy average three-year revenue growth of 37%. Best of all ABD trades at a modest forward 18x PE further supporting the thesis here.
Among these strong fundamentals and favourable industry outlook, we see significant upside for this undiscovered gem.
This article was first published on Livewire Markets on June 9th, 2021.