Codan In Line For Re-Rating?

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Strong demand for a number of metal detection and mining solution products has driven Codan to upgrade guidance, providing validation for a positive outlook from several brokers.

-Demand for the company's products has become more broad-based
-Significant contract win with BHP
-Caterpillar deal underpins Minetec's underground technology solution
 

By Eva Brocklehurst

Positive trends have emerged for Codan ((CDA)), which supplies metal detection services and software solutions to miners. Strong demand for a number of the company's products has driven an upgrade to earnings guidance.

The main aspect of the upgrade that pleased Canaccord Genuity was the spread across a number of new products, rather than being driven solely by demand for Minelabs' high-value, high margin GPZ7000, or any "gold rush" demand.

Product releases, including the Equinox coin and treasure detector, as well as lower and mid-priced gold detector products have meant demand has been more broad-based. New earnings guidance is around 9-10% ahead of the broker's estimates, with net profit in the region of $38m.

Moelis estimates the growth in new products should dilute the contribution of gold detectors to around 35% of revenue by FY20 from around 45% of revenue in FY17. This earnings base is expected to broaden over time and generate a re-rating of the stock, in the broker's view.

A net cash position of $20m has been indicated, providing scope for acquisitions or a greater dividend. This implies, Moelis calculates, that around $30m in cash has been generated through the first four months of 2018. The broker upgrades net profit estimates by 8.7% to $39.2m and FY19 by 16% to $40m.

Supported by the launch of the new Equinox machine and a deal struck with BHP ((BHP)), Moelis maintains a Buy rating and $3.32 target.

Minetec

Minetec, Codan's tracking solutions division, will supply BHP's Olympic Dam mine in South Australia with a fleet management system for underground mining. The contract is estimated at $9.5m over a 12-18 months period.

Brokers understand the tender was very competitive and, in addition to the recent distribution agreement with Caterpillar, should assist Minetec in expanding rapidly. Canaccord Genuity compares this contract with first half division revenue of $2.3m, signalling this is a significant win.

Moelis increases FY19 revenue estimates by around $3m to account for the deal with BHP. Back in February Minetec entered into an exclusive deal with Caterpillar to integrate its underground mining technology solution with the Caterpillar Minestar product.

Underground mining software solutions are strategically important for Caterpillar, Moelis points out, as this can assist in generating sales of trucks and machinery, the core of its business.

The revenue model is structured under a profit share arrangement and Codan is entitled to at least 50% of the profit margin on sale of the Minestar integrated product. While the deal is exclusive to Caterpillar this does not affect Codan selling its own Minetec product directly to customers, such as BHP.

Radio Communications

The company did not specifically address the radio communications division in its update but Moelis assumes, based on the strong level of guidance, that this division can now produce revenue in FY18 similar to FY17. Growth expectations in FY19 are based on increased sales of the recently-released products aimed at the military and the North American market.

Canaccord Genuity believes momentum in metal detection and Minetec will drive base-line earnings higher in FY18 and that, in turn, should drive a re-rating. Target is raised to $3.50 from $3.00 and a Buy rating is maintained.

The stock is priced at a -20% discount to the Small Industrials average. The discount is considered warranted at this point in time but Canaccord Genuity expects it to narrow, as further evidence of sustainability and growth can be demonstrated.

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