Company Overview: Codan Limited (ASX: CDA) is a technology-based company, engaged in manufacturing and developing robust and diversified technology solutions to resolve customers’ communications, security, safety, and productivity problems in some of the toughest environments globally. Founded in 1959 and headquartered in South Australia, the company has a global footprint in Brazil, Denmark, Canada, Ireland, Singapore, Mexico, the UAE, UK, and the USA.

CDA Details

CDA Rides on Divestment, Acquisition Synergies & Growth Strategies: CDA witnessed robust results in FY21, delivering another record profit. The company has completed the acquisition of Domo Tactical Communications (DTC) and Zetron on May 13, 2021. The acquisition is expected to strengthen the core business through releasing new products and expanding its geographic footprint. It also streamlined its business with the divestment of Minetec Pty Ltd (Minetec) on June 2, 2021 and expected to maximise the performance of the recently acquired companies.

Key Findings from FY21 Results:

• Rise in Revenues: In FY21, the company’s revenue soared 26% on pcp and came in at $437.05 million. The growth was aided by robust demand for metal detectors across the company’s market with sales growth of 38%, and increased distribution into big box retailers.
• Increase in Statutory Net Profit: Net profit after tax stood at $90.2 million, representing a rise of by 41% year over year. The company continues its operations scale, with higher manufacturing capacity and inventory to minimise supply disruption and reduce freight costs.
• Higher Underlying EBITDA: In FY21, EBITDA stood at $158.8 million, depicting an increase of 35% year over year.
• Improvement in Earnings Per Share (EPS): The company recorded EPS of 54.0 cents, up 52% year over year.
• Enhancing Shareholder’s Value: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent net cash position, strong liquidity, improved cash flow in FY21, CDA declared a final fully franked dividend of 16.5 cents per share, bringing the full-year dividend to 27.0 cents, up 46% year over year.
• Other Key Developments: In FY21, the company unveiled its new GPX6000® gold detector and MF5® Countermine detector. The company also opened a new sales office in Mexico to focus on gold mining and recreational markets and unveiled a direct-to-consumer e-commerce platform in Brazil for recreation products.

The below picture depicts a continuous growth trajectory in CDA’s top line.

Revenue Highlight; Analysis by Kalkine Group

Balance Sheet and Liquidity Position: The company exited FY21 with a cash balance of $22.36 million. During FY21, the company generated an operating cash inflow amounting to $131.3 million, compared to an operating cash inflow of $103.98 million reported in the year-ago period. The company had an excellent cash generation capacity with negligible net debt at the end of FY21, after funding circa $174 million for acquisitions.

Key Metrics: For FY21, the company reported an EBITDA margin of 36.5%, higher than the year-ago figure of 34%. In FY21, the company recorded cash cycle days of 64.6 days compared to the industry median figure of 141.8 days.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 44.74% 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 19.28%, followed by Dareel Pty. Ltd. holding 9.92%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• COVID-19 Led Uncertainties: The company is exposed to the pandemic restrictions on travel, deferred government programs and delays in the deal closures on its Tactical Communication business
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Integration Risk: CDA is acquiring many companies, which results in some integration risk.
• The company is exposed to foreign currency fluctuation risks and technology disruptions in the business model.

Outlook: The company remains well placed for another successful year in FY22, thanks to the demand for its metal detectors products. It expects Minelab to benefit in FY22, from its new launch of a new gold detector GPX6000®. In addition, CDA expects to witness synergies from the recently acquired DTC and Zetron in its Communications segment in FY22. Further, ongoing investment in product innovation to capitalise on new market opportunities remains key growth driver. The company’s initiatives mentioned above position it well to deliver another strong performance in FY22, thus giving it further opportunities to explore, develop, and deploy its technologies.

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 ~21.02% in the past three months. Currently, the stock is trading slightly above the average of its 52-week high and low levels of $19.43 and $9.20, respectively. 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 discount as compared to its peers’ median, considering the impact on its Tactical Communications business from COVID-19 outbreak, pandemic restrictions on travel, deferred government programs and delays in the deal closures. For the purpose of valuation, peers such as Smart Parking Ltd (ASX: SPZ), Senetas Corp Ltd (ASX: SEN), Data#3 Ltd (ASX: DTL), etc have been considered. Considering decent liquidity position, higher revenue base, positive outlook, synergies from the buyout, current trading levels, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $14.87, as on 27 August 2021, 11:30 AM (GMT+10), Sydney, Eastern Australia.

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.

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