Company Overview: Founded in 1959, Codan Limited (ASX: CDA) offers technology solutions to resolve customers’ communications, safety, security, and productivity problems across the globe. The company’s customers consist of United Nations organisations, security and military groups, mining companies, government departments, and individual consumers and small-scale miners.

CDA Details

CDA Rides on Acquisition Synergies & Decent Fundamentals: CDA has delivered consistent performance, month on month, throughout FY21. The company strengthened its core businesses via product development, contract wins, partnerships and acquisition integration. This, in turn, has aided the company to evolve into an integrated, sustainable, and balanced business.

Acquisition Spree & Contract Wins:

• On 1 December 2021, CDA purchased 100% of the shares of the UK-based firm, Broadcast Wireless Systems Limited (BWS), by its subsidiary Domo Tactical Communications Limited (DTC) from the founders of BWS. CDA used its existing debt facility to fund the transaction including, ~$3.7 million upfront payment, with the option of an additional payment of up to $4.8 million upon the fulfilment of earnout targets over the next three years. The buyout will aid CDA to own a high-quality tech portfolio of wireless video camera links, video broadcast products, and strengthen its foothold in the remote broadcast industry. 

• The company has completed the acquisition of DTC and Zetron on May 13, 2021. The acquisition is expected to strengthen the core business 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. 

• DTC has also won a multi-year contract to supply its software-defined mesh radios to Fitch AAA credit rated global technology corporation as part of a sensitive military program (Program). This marks a significant milestone for CDA’s recently acquired DTC business, with a strategy to successfully deliver communications solutions globally to the security and military sectors, thus growing its overall business scenario.

Strategic Achievements in FY21 (Source: Analysis by Kalkine Group)

Delve into FY21 Financial Highlights:

• In FY21, the company’s revenue went up by ~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.
• 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.
• It also streamlined its business with the divestment of Minetec Pty Ltd (Minetec) on 2 June 2021 and is expected to maximise the performance of the recently acquired companies.
• 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.
• 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.

FY21 Sales 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 27.2%. In FY21, the company recorded cash cycle days of 64.6 days compared to the industry median figure of 135.1 days.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 44.5% 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 

Risk Analysis: The company faces the risk of realisation of synergies from acquisitions, technological changes, and cyber security risks. In addition, uncertainty around Tactical Communications, increased freight costs, and supply chain disruption due to COVID-19 still exists, which might impact the financials of the company in the near term.

Outlook: The company’s higher investments in core and emerging technologies will provide a pipeline of differentiated capabilities, thus expanding its geographic footprint. The initial purchase order received for DTC products by Fitch AAA credit rated global technology corporation will be delivered in the coming 12-month period, 60% of which is likely to be delivered in FY22. Also, the management expects to continue its policy of paying shareholders ~50% of its full-year profits as dividends. The company expects DTC to deliver FY22 EBITDA of $14 million. Further, 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 ~31.34% in the past three months. Currently, the stock is trading close to its 52-week low level of $9.03. 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, considering the risk of acquisition integration, supply chain disruption, the impact on its Tactical Communications business from the COVID-19 outbreak, cybersecurity risks, etc. For the purpose of valuation, peers such as Link Administration Holdings Ltd (ASX: LNK), Senetas Corp Ltd (ASX: SEN), Data#3 Ltd (ASX: DTL) have been considered. Considering the acquisition synergies, current trading levels, record levels of sales, and cash flows in FY21, new contract win in the US by DTC, decent liquidity position, encouraging outlook, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $9.38, as on 17 December 2021, 11:00 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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