Company Overview: Codan Limited (ASX: CDA) offers technology solutions to resolve customers’ communications, safety, security, and productivity problems across the globe. The company was founded in 1959 and started trading on ASX in November 2003. Its customers consist of United Nations organisations, security and military groups, mining companies, government departments, etc.

CDA Details

Spotlight on CDA’s Key Accomplishments and FY21 Results: CDA has delivered consistent performance, month on month, throughout FY21, and expects the same to continue in FY22 & beyond via product development, contract wins, partnerships, and acquisition integration.

• EBIT on Growth Trajectory: Since 2014, the company has increased its EBIT across the business to ~$130 million in FY21 from ~$14 million in 2014, thanks to the 1000 day rolling growth strategy and Long-Term Incentive (LTI) scheme.
• Record Level of Sales and Profit: In FY21, underlying net profit after tax stood at $97 million and group sales of $437 million, depicting a rise of 52% and 26%, respectively. The results were driven by the rise in the gold detector and recreational metal detector sales across most markets.
• Enhancing Shareholder’s Value: CDA remains committed to generating long-term value for its shareholders. The company declared a final dividend of 16.5 cents per share (fully franked) in FY21. This resulted in a total dividend of 27 cents for the full year, depicting a rise of 46% from FY20.
• Strong Balance Sheet Aid CDA Amid Rising Cost: The company has a strong balance sheet, with no debt at the end of FY21, against a cash and cash equivalent balance of $22.36 million. During FY21, the company generated an operating cash inflow amounting to $131.3 million, up from inflows of $103.98 million reported in FY20.

What’s More?

• Geographical Expansion: The company has a growing presence in North America and Europe and have ~300 employees in USA and Canada and over 100 in Europe.
• CDA Gains from Acquisition: Recently, CDA purchased 100% of Broadcast Wireless Systems Limited (BWS) shares via its subsidiary Domo Tactical Communications Limited (DTC). It is worth mentioning that CDA also acquired the businesses of DTC and Zetron. The move aligns with its vision to own a high-quality tech portfolio and bolster its position in the remote broadcast industry. The company expects the DTC business to deliver FY22 EBITDA of $14 million.
• Higher Investments: In FY21, CDA invested more than $30 million in engineering to expand its revenue base via new product launches. This, in turn, aided the company to gain a competitive edge in the market, and drive future growth.

Dividend Highlight (Source: Analysis by Kalkine Group)

Key Metrics: For FY21, the company reported a gross, EBITDA, Operating & Net margins of 55.6%, 36.5%, 29.9%, and 20.6%, higher than the industry median figure of 27.2%, 18.5%, 11.2% and 9.9%, respectively. In FY21, the company recorded cash cycle days of 64.6 days compared to the industry median figure of 135.1 days. ROE for the period came in at 32.8%, higher than the year-ago figure of 27.8%. 

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 44.53% 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 

Woes:

• Pandemic: The continuance of COVID-19-constraints owing to the possibility of a third wave has lifted worries for CDA as it might lead to increased freight costs.
• Other Concerns: The industry players have also been seeing supply-chain disturbances and price increases in raw materials and other expenses, which might weigh on their margins and profitability. The hackers and cybercriminals benefit from the pandemic-caused hype and use it to steal passwords and data, thus exposing vulnerabilities in security systems globally.

Short & Long-term View: Due to the planned initiatives mentioned above, CDA remains on track for one more successful year in FY22. The company will benefit from the robust demand for its metal detection products in the coming days. The company is well equipped to integrate the newly acquired DTC and Zetron businesses into its communications segment. In addition, the board expects to continue its policy of paying shareholders ~50% of its full-year profits as dividends. Further, higher investments mark a key milestone in the company’s manufacturing capacity and inventory to minimise supply disruption, drive future growth and position it well to gain an edge over its key competitors.

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 ~50.23% in the past six months. Currently, the stock is trading close to its 52-week low level of $8.34. 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, 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), and others have been considered. Given the factors mentioned above, current trading levels, record levels of sales and net profits, synergies from buyouts, zero debt levels, new contract wins, encouraging outlook, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $8.380, down by ~3.568%, as on 21 January 2022.

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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