Company Overview: A technology-based company, Codan Limited (ASX: CDA) manufactures and develops diversified technology solutions and operates in Communication Equipment’s and Metal Detection Segments for government departments, United Nations organisations, and mining companies.

CDA Details

Higher Investments & Robust Product Adoption Aids CDA: The company remains well focussed on investing and integrating the Domo Tactical Communications (DTC) and Zetron businesses in FY22 (acquired in May 2021). Also, the company expects robust demand for metal detection products, as it has started FY22 well in line with the FY21 run rate. The company also remains on track to continue investing massively in new product development in Minelab.

A Quick Look at FY21 Key Aspects:

• Robust Performance from Minelab: During FY21, Minelab recorded a strong performance, with sales rising by 38% on a year over year basis to $327 million, owing to growth across all market segments. Notably, the company’s recreational and gold mining sales also increased on a pcp basis, with Countermine sales witnessing a rise of 34% on FY20.
• Product Launches: In 2HFY21, the company unveiled the GPX6000 ® and anticipated it to be the bestselling high-end gold detector in the coming years. GPX6000 ® is likely to be a key contributor to Minelab’s sales in FY22. In FY21, the company also introduced MF5®, fulfilling the latest metal detection technology requirements across single and dual sensors.
• Record Level in Land Mobile Radio (LMR): CDA witnessed robust LMR sales in FY21, thanks to the solid demand for its MT4E product line, large federal orders, and the successful production and delivery of three major systems across the United States. Notably, LMR strategy expanded significantly into adjacent technology solutions, as the company completed the Zetron acquisition and re-branded its existing LMR business as Zetron.
• Divestment of Minetec: Under CDA’s tenure, the Minetec business did not perform well as required for a technology-based business. Hence, in order to streamline the business to focus on core segments, the company sold 100% of the shares in Minetec to Caterpillar Holdings Australia for $18 million cash.
• Higher Investments: During the period, the company invested more than $30 million in engineering to expand and diversify its revenues via new and enhanced product launches. The move marks a key milestone in the company’s increasing investment in the manufacturing capacity and inventory to minimise supply disruption, drive future growth and position it well to gain an edge over its key competitors.
• Top-and Bottom-Line Performance: In FY21, the company’s revenue increased a whopping 26% on pcp and came in at $437.05 million. Net profit after tax skyrocketed 41% year over year and came in at $90.2 million.
• Balance Sheet and Liquidity Position: At the end of the year, the company had a strong cash generation capacity, with almost zero net debt, post-funding circa $174 million for acquisitions. In FY21, the company’s operating cash inflow stood at $131.3 million, against $103.98 million in FY20.

Supported by its decent cash position, 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. The below picture depicts a continuous growth trajectory in CDA’s dividend profile.

Dividend Highlight; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported a gross margin of 55.6%, higher than the industry median figure of 28.9%. In FY21, the company recorded ROE of 32.8% compared to the industry median figure of 10.4%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 44.67% 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 9.9%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis:

• CDA is a technology-focused business and is prone to cybersecurity risk and managing customer data.
• In addition, uncertainty around Tactical Communications and supply chain disruption due to COVID-19 still exists, which might impact the financials of the company in the near term.
• The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Further, integration risk, and foreign currency fluctuation risks may erode bottom-line growth.

Outlook: CDA expects to witness synergies from the recently acquired DTC and Zetron in its Communications segment in FY22 and strengthen its core business through releasing new products and expanding its geographic footprint. With the divestment of Minetec, the company expects to maximise the performance of the recently acquired companies and focus on its core business segments. Also, the management expects to continue its policy of paying shareholders ~50% of its full-year profits as dividends. Further, the ongoing investment in product innovation to capitalise on new market opportunities remains a key growth driver.

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 ~25.63% in the past six months. Currently, the stock is trading below the average of its 52-week high and low levels of $19.43 and $9.2, 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 some discount as compared to its peers’ median P/E multiple, considering the impact on its Tactical Communications business from the COVID-19 outbreak, supply chain disruption, deferred government programs, cybersecurity risks, etc. For the purpose of valuation, peers such as EROAD Ltd (ASX: ERD), Senetas Corp Ltd (ASX: SEN), Data#3 Ltd (ASX: DTL), etc have been considered. Considering geographical diversification, acquisition synergies, divestment of business to focus on key areas, decent liquidity position, increase in the top-line, decent outlook, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $12.65, as on 08 October 2021, 1:00 PM (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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