Codan Limited

Company Overview: Codan Limited (ASX: CDA) operates as a technology company providing communications and metal detection products. It offers technology solutions to resolve customers’ communications, safety, security, and productivity problems across the globe. The company conducts operations in Canada, the United States, Ireland, the United Arab Emirates, and Brazil. The company started trading on ASX in November 2003.

CDA Details

This report is the full version of the report published on 13 May 2022 at 2:47 PM GMT.

1HFY22 Key Takeaways & Diversification Strategies: The company remains on track to achieve consistent growth via the supply of world-class technology and innovation. Through product development, contract wins, partnerships, and acquisition integration, the company strengthened its core businesses. This, in turn, has aided the company to progress into an integrated, sustainable, and balanced business.

• Impressive Sales and Profit Growth: In 1HFY22, the company's revenue went up by ~32% on pcp and came in at $256.75 million. CDA witnessed an increase of $84 million in communications revenue, positively impacting the half-yearly results. Communication segment saw a forward order book of $163 million. In 1HFY22, CDA posted its highest half-yearly net profit in its history, depicting a rise of 21% year over year, driven by gold detector and recreational metal detector sales across most markets.
• Record level of EBITDA: The company has increased its EBITDA across the business to ~$83.1 million in 1HFY22, up 20% year over year, thanks to a gain on Minetec sale, which was more than offset by additional one-off integration and restructuring costs. CDA invested higher in increased inventory levels across all businesses and placed itself well to enter 2HFY22 on a solid note.
• Dividend Track Record: CDA has driven shareholder value through regular dividends and business reinvestment. CDA declared an interim fully franked dividend of 13 cents per share, 24% year over year. A robust capital allocation strategy drives long-term sustainable growth and shareholder value.
• Liquidity & Balance Sheet: The company exited the period with a cash balance of $10.65 million. The company saw a rise in receivables driven by higher Communications sales in November and December 2021. Net debt increased by $46.2 million from the end of Jun’21 to Dec’21, driven by working capital investment and FY21 related cash outflows.

The below picture showcases the acquisition of DTC and Zetron by CDA. The purchase is expected to strengthen the core business of CDA by releasing new products and expanding its geographic footprint. The company remains well focussed on investing and integrating the DTC and Zetron businesses in FY22.

Acquisition Snapshot (Source: Analysis by Kalkine Group)

Key Metrics: For 1HFY22, the company reported a gross profit margin, EBITDA, & net profit margin of 57.2%, 27.5%, and 19.5%, higher than the industry median figure of 31.4%, 24.1%, 16%, respectively. 

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 45.09% of the total shareholdings, while the top 4 constitutes the maximum holding. Wall (Ian Baker) held the maximum number of shares with a percentage holding of 19.24%, followed by Dareel Pty. Ltd. holding 9.91%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Key Risk:

Risk Analysis; Analysis by Kalkine Group 

Outlook: The company’s ongoing investments in product development aid CDA in augmenting its revenue base and allow it to provide great products and solutions to its key customers. This, in turn, aided the company to gain a competitive edge in the market, and drive future growth. The company is well equipped to integrate the newly acquired DTC and Zetron businesses into its communications segment and deliver a more balanced sales portfolio across the group.  The company’s GPX6000 gold detectors have also received wide recognition in the developing market. Also, the management expects to continue its policy of paying shareholders ~50% of its full-year profits as dividends.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~20.74% in the past three months. The stock just recovered from its 52-week low price of $6.27. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium as compared to its peers, considering the acquisition synergies, record net profit achieved in H1FY22, etc. For the purpose of valuation, peers such as Link Administration Holdings Ltd (ASX: LNK), Senetas Corp Ltd (ASX: SEN), Ava Risk Group Ltd (ASX: AVA), and others have been considered. Given the current trading levels, record levels of sales and net profits, synergies from buyouts, new contract wins, encouraging long-term outlook, indicative upside in the valuation and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $6.880, as of 13 May 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing

CDA Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.