ABV, Advanced Braking Technology Limited engages in the research, design, development, manufacture, distribution, and sale of braking solutions worldwide. The company offers braking solutions for light, heavy, defense, and electric vehicles, as well as autonomous vehicle emergency braking and brake controllers under the ABT Failsafe, ABT Failsafe Emergency, and Terra Dura brand names. The company also exports its products. It serves mining, defense, civil construction, and waste management industries. The company was incorporated in 2001 and is headquartered in Wangara, Australia.
The 4C released in Jan 2024 drew my attention to this business, as they were OCF +'ve by about $350k (after deducting gov grants), there are probably some SBC costs that need to be deducted as well, but its probably about $280 FCF, which on an annualised basis would be $1m and I believe that would be a first for the business. The problem is the -$867k OCF in the previous quarter. On this basis I am thinking that around $500k OCF for the full year.
They look to have done $7m revenue for H1, basically just a touch more than H1 last year, but they had a very strong Q2 in 2023 due to inflows from the developement projest with Glencore. In the Q3 4C this was the comment -"Revenue in the quarter also includes a small portion related to the development stage of the ABT Glencore joint product development." Ok, realised the R&D revenue is split out in each 4C, its why they quote Revenue from Ordinary Activities & Revenue from Continuing Operations Because they only started splitting it out like this after Q2 2023, I assume they commenced when the R&D income started flowing in - which means the Q2 result in 2023 was an outlier at $3.96m
So small growth in Revenue so far this year and some good improvement in margin.
A couple of things attract me about this business, its easy to understand, the reports are very concise and fluff free, no glossy photos, almost no mention of bullshit earnings, no bullshit bingo terms like AI, flywheel effects, inflection points, SaaS, ARR etc. Also directors and management have skin in the game with significant shareholdings. Also last 5 years show strong ROIIC, and a strong operating cushion of 23% suggesting to me the business is starting to scale up. Also its debt free. Shares a director with another of our holdings, LBL. Ms Dagmar Parsons
At the current price of 5c, and assuming a discount of 10% and a growth rate of 5%, it implies a FCF of about 0.0025c - which would be roughly $1m total FCF - which would be a stretch after the poor first quarter result., but its not wildly expensive. PEG is under 0.5 both on revenue and earnings growth.
Things I dont like is its still not profitable in any meaningful sense, complicated SBC thru various tranches of options, potentially adding to an already large share count.
I imagine there are some risks to the business, I get the impression there are only a fairly small number of customers, it seems like a product that has some risk from competition, although its not very sexy! Brakes are not where most entrepreneurs are focussed! Some geographic risks, they are active in Africa.
So the downside thesis for ABV is probably just that growth slows and it remains a very small business eeking out a small profit, the problem is that the current price implies some continued growth so there is a real probability of loss of capital if it cant at least continue modest growth. My calculations are that it needs about 5% growth to justify price. This would be a significant drop from the average of 20% revenue growth over the last 4 years. Obviously the other risks are things like management making poor capital allocation decisions, mergers & acquisitions, new business ventures, dividends, buy backs etc. This is somewhat mitigated by their track record and skin in the game.
The upside is thesis is that growth continues at a similar rate to the last 4 years - 20% revenue growth average. I would expect this to generate strong earnings and FCF growth, hard to quantify but I expect it to be more than the 5% my modelling gave for the current share price. So to comply with my thesis ABV will need to grow FCF at better than 5% going forward and this should be the test for continuing to hold.
