Why I'm adding ABV - Advanced Braking Technology to my Strawman portfolio

•Blue chip customer base in mining, civil construction and miliary

•Profitable

•Global market leader in a niche market - largest SIBS supplier in the world

•International market, with company exporting to over 40 countries

•Own their IP

•Undemanding PE ratio of 11.6

•David Slack NED owns 19.81%; however, low insider ownership beyond him

•Appear to have a focus on culture, constantly mention team in AR

•ESG and mining tailwinds (e.g. EV metals growth)

•>30% of revenue comes from overseas with ability to grow this

•Strong balance sheet with nearly no debt

•Free cash flow positive

•Healthy and improving gross and net margins

•ROIC of 21%

Why I would consider selling

•Overvalued

•Loss of major customer

•No longer profitable or free cash flow positive (excluding acquisitions)

•Single digit revenue growth

•Deteriorating ROIC

Financials

ABVs margins have grown from 45 to 50% over the past year, while revenues have grow 16, 14 and 28% over the past 3 years.

The company has been profitable and cash flow positive the past 4 years with profit growing from $644,000 to $1.474M and achieving a net profit margin of 10.4%.

Segment revenue isn’t provided by ABV but they do brakedown (pun intended) revenue by geographical region as well as major customers. With 2023 revenues of $14.15M and profits of $1.474M, should ABV lose their largest customer they would, just barely, remain profitable.

The company has a strong balance sheet with $2M in cash, net assets of $6.9M and debt (interest bearing liabilities) of just $223,000.

Lastly, ROIC has been steadily improving over the past 4 years which could indicate ABVs moat is widening.

ASX: ABV – Advanced Braking Technology

Advanced Braking Technology has been around for 20 years. Pre 2019 they were predominantly an R&D company, investing millions into brake technology. Since 2019 they have pivoted to a commercial format with the appropriate management team to guide them. Their principal activities include research, development, design, commercialisation and manufacture of braking solutions for light, heavy, defence and electric vehicles as well as emergency braking and brake controllers under the ABT Failsafe, ABT Failsafe Emergency and Terra Dura brand names.

ABT export to over 40 countries, up from 16 a year ago and claim they are the market leader in failsafe braking. Management state innovation and safety are at their core and that they tick all 3 ESG boxes.

Heavy vehicles and their wet brake solutions are key to their growth. They offer recreational users a dry sealed product, Terra Dura. This is still too costly and not a priority for the company but they hope to one day get the cost down on this while maintaining margins.

The mining services industry makes up roughly 70% of their sales following by mining at 15%, fleet management at 7%, defence at 5% and waste management at 1%.

They are the original equipment manufacturer of their sealed brake technology and they own the IP. They’ve invested millions into their braking products which offer improved safety and performance and zero emissions, ticking the ESG box. As a result they have a strong blue chip customer base.

The Problem

Maintenance

Traditional open brake systems being used in mining are prone to contamination and corrosion and need to be stripped and cleaned every few weeks. This results in significant downtime on an asset that is being used 24/7. ABTs sealed integrated braking system (SIBS) offer operational improvement and considerable cost savings providing months of maintenance free operation, critical for mining companies with fleets of 100’s of vehicles in constant use.

Safety

ABTs Failsafe offerings can be incorporated into the park and emergency brake system to automatically apply when the E-Stop button is pressed, the engine is turned off or a vehicle door is opened. This provides a high level of safety for vehicle operators and site personnel ensuring the vehicle cannot roll away unexpectedly.

Emissions

50% of a diesel vehicles emissions are exhaust and 25% brakes. The company’s Sealed Integrated Brake Solutions (SIBS) protect the environment by eliminating all brake dust emissions, improving air quality.

Interested to see Ukraine asking for the Hawkei platform to be thrown into the mix for contributions to the Russia-Ukraine war. One of the reasons the government has cited for not yet offering it are braking issues. Australian Braking Technology (ABV) was contracted by Thales to provide a braking solution to the Hawkei platform in 2019. This was done under a licensing agreement with VEEM (VEE) - who predominantly provide maritime propulsion technology. ABV provide a number of braking capabilities to mining and commercial transport companies. I believe the Hawkei contract was around the park brake offering, called Failsafe. The brake issue cited with Hawkei seems to be around the service brake at medium/high speed and, therefore, not a reflection on ABV. However, I could be making that up and you'd want to fact check that before making an investment.

ABV has been on my watchlist for the last 12 months or so. It's been a listed entity for donkeys but has been a bit of a basket case for most of that. A change in Board/management has started to show some early signs of playing out but it's still early days. The cancellation/variation of a recent contract with Glencore has given a bit of pause, but it does seem to be more of a Glencore issue than an ABV one. It's one I'm keen to see the full year results of, to see whether the recent untick in performance can continue.

ABT awarded Defence Global Competitiveness Grant

Highlights

• ABT awarded a Defence Global Competitiveness Grant to the value of $240,000

• Grant to be used to strengthen ABT’s in-house manufacturing capability

• Positions ABT to capitalise on future defence contract opportunities

DISC: I have small holding