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Codan To The Fore In Critical Communications

Australia | Apr 08 2021

This story features CODAN LIMITED. For more info SHARE ANALYSIS: CDA

Codan's latest acquisition in the critical communications market should put the company at the forefront of the US government's Next Generation 911 upgrades

-May be able to capture portion of US$15bn in infrastructure funding
-Earnings visibility low yet opportunities are expanded
-Visibility on African gold detector sales a challenge


By Eva Brocklehurst

Communications equipment specialist Codan ((CDA)) will acquire Zetron, a regional/rural provider of US critical communications in the first responder market. Brokers expect the acquisition, for US$45m, will bring about greater scale and allow Codan to take advantage of a broader platform for growth.

Like the recent acquisition of Domo in the tactical communications segment, Zetron is likely to accelerate momentum in critical communications, Canaccord Genuity asserts.

Annual revenue should increase to around $110m from $40m and provide greater scale with access to a larger market. The business complements an existing critical communications offering and provides an end-to-end solution targeting the public sector, primarily in North America.

Zetron is a good strategic fit, in Macquarie's view, adding a strong brand to the LMR (land mobile radio) communications segment. An $8m contribution to operating earnings (EBITDA) is expected in FY22 and this includes conservative cost synergies as Zetron is merged with the LMR division.

The broker finds the command and control (critical communications) sector attractive as revenue is more recurring compared with tactical communications, and could be supported by new US government expenditure.

Zetron's technology includes voice dispatch, emergency call taking, mapping, computer-aided dispatch and fire station alert. The company's products connect command centres to field personnel and the addressable market in emergency response is expected to grow by around 9%.

Moreover, around US$15bn of funding is under consideration as part of the US government's bill relating to Next Generation 911 funding, relating to updating of infrastructure. Moelis points out only Zetron and Motorola offer a full suite of applications.

Brokers also suggest Codan's head of critical communications, Scott French, who previously worked at Zetron, helps de-risk the acquisition and the combined businesses will be able to competently service a growing market.

Earnings visibility is low because of the nature of the product and distribution but Moelis points to a multi-year growth trajectory that will be supported by new product releases and accretive earnings from Zetron, and maintains a Hold rating with a $15.81 target.

Canaccord adopts management's forecasts for FY22 and on that basis increases revenue forecasts by 11.5%, assessing a premium is warranted in the share price of Codan given an above-average growth outlook for earnings per share and upside risk to earnings forecasts.

The acquisitions bring about material change and diversification of both product and geography should be welcomed by the market. As a result, Canaccord Genuity raises the target to $17.10, retaining a Buy rating.

Gold Detecting

Codan also has a dominant market position and intellectual property in metal detection with growth opportunities in that area in new geographies such as South America and Asia. While it remains to be seen how significant the launch of the GPX6000 will be, Macquarie notes Codan has previously entered strong upgrade cycles after the launch of a new gold detector.

The gold price and the visibility of African sales are a challenge for investors, the broker concedes, but an upgrade cycle and material gains in market share in the recreational segment are potential offsets.

Macquarie acknowledges the share price has run hard but believes in the potential for additional revenue synergies from recent acquisitions and retains an Outperform rating with a $17.00 target.

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