This small-cap growth stock may be a millionaire maker

Looking for growth? Paul Summers thinks this small-cap could be a great long-term hold.

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Thanks to their relatively modest market capitalisations, stocks lower down the market spectrum have the ability to multiply in value over relatively short periods of time. Just ask holders of high-flyer AB Dynamics (LSE: ABDP).

Over the last four years, the company — which provides advanced testing systems and measurement products to the global motor industry — has almost six-bagged in value. £5,000 invested when the firm came to market in May 2013 would now be worth close to £30,000.

Based on this kind of performance and the expected growth in demand for the company’s products, it doesn’t seem unreasonable to suggest that early investors with significant holdings could be well on their way to making a life-changing amount of money from the stock.

“Considerable progress”

Today’s final results help underline the “considerable progress” made by AB Dynamics. In the year to the end of August, revenue climbed 20% to £24.6m. The increase in adjusted operating profit was even better — rising by just over 26% to £5.9m.  

Over the 12 months, AB saw demand for its driving robots and guided soft targets reach an “all-time high“. The company now boasts a “record order book” that assures earnings visibility into the third quarter of next year. A lot of this can be attributed to the “strong growth” seen in the Advanced Drive Assistance Systems (ADAS) market, as automotive OEMs respond to recent regulatory changes.

In August, the business announced that it has received its largest-ever order for driving robots from the China Automotive Technology and Research Centre (CATARC). The organisation — a leader in the testing of Intelligent and Connected Vehicles in China and an existing customer of AB Dynamics — will use the latter’s technology to “expand its track-based testing capabilities” in response to demand from clients.

With its new £8.4m state-of-the-art factory and offices close to completion, the fact that AB has already purchased further land for an additional factory to meet its expansion needs gives an indication of just how confident management is in the company’s future.  

What’s the catch?

At 26 times forecast earnings, stock in AB Dynamics is expensive to acquire. An expected yield of 0.5% will also be of no interest to those seeking income, despite the company confirming a 10% rise in the total dividend this year. Nevertheless, recent developments, the increasing popularity of hybrid/electric cars and the huge excitement surrounding the prospect of fully autonomous vehicles suggest those looking for growth-focused companies could do a lot worse than take a closer look at the firm.

Based purely on historical numbers alone, AB looks like a winner. It scores highly when it comes to returns generated on sales — otherwise known as operating profit margin — and the money it invests (ROCE). Despite a 400% rise in capital expenditure to £8m over the last 12 months, AB’s balance sheet also continues to look very robust. Its current £9.6m net cash position is only slightly lower than at the end of the last financial year (£10.4m) helped no doubt by the oversubscribed £6m (net) equity fundraise in December.

At just £150m, AB still has a lot of room to grow. While not the bargain it once was, I think those taking a position in the stock today could still see a great return over the medium-to-long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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