Treasure Chest: Opportunity In Codan

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Codan has a track record of overachieving on forecasts and FY21 sales were robust, so with a subdued share price is there a buying opportunity?

-Codan in a strong position in terms of distribution and growth potential
-Strong demand for the company's latest metal detection products
-Acquisitions likely to transform the communications division
 

By Eva Brocklehurst

Codan ((CDA)) has a dominant position in metal detection globally amid limited competition, and sales for its products across all categories in FY21 were strong. Furthermore, the company is experiencing strong demand in artisanal mining (independent amateur prospectors) and has made significant investments in manufacturing capacity.

Inventory has more than doubled to around $66m in order to minimise supply disruptions and reduce freight costs. Underlying net profit of $97m was up 52% and sales up 26% in FY21, supported by a material increase in communications and tracking solutions as well as strength in metal detection.

With this backdrop, Moelis questions why the share price has de-rated, noting it has fallen -32% since before the FY21 result and suspecting this was largely because CEO Donald McGurk's retirement was looming. Moreover, Codan had provided its usual conservative FY22 outlook.

The broker brushes aside the retirement of Donald McGurk, who will leave within the next few months, although acknowledges the impact, highlighting the business is in its strongest-ever position in terms of product and distribution.

To the other point, while management has suggested the organic growth outlook is fairly flat, the broker points out Codan has a five-year record of overachieving on guidance. Thus, Moelis, in flagging the growth opportunity, upgrades to Buy from Hold with a target of $17.12.

Codan had indicated it was too early to provide guidance at the FY21 result yet Macquarie, with an Outperform rating and $17.50 target, points to a record sales run rate being maintained into the early part of FY22.

In the broker's view, the main uncertainty surrounds the supply chain in tactical communications because of the pandemic. Canaccord Genuity agrees the tactical communications division does not have a substantial pipeline while the acquisitions of Zetron and DTC are only in the early stages of being integrated.

Management rarely provides much in the way guidance early in the financial year so the broker was not surprised at the cautious approach, given FY21 was a record year in terms of metal detection sales. Moreover, the balance sheet is accumulating cash with $80-90m estimated for the end of FY22.

Canaccord Genuity, maintaining a Buy rating with an $18.40 target, considers the soggy reaction to the FY21 result a buying opportunity as current pricing does not reflect the attractive growth profile nor the upside risk to earnings and the ungeared balance sheet.

Metal Detection

Canaccord notes July saw record sales of the company's GPZ7000 detector and demand for metal detection products is robust, with Minelabs expected to benefit from the new GPX6000 gold detector sales.

The company has a good record for new product development and launching in global markets and the broker does not expect the GPX6000 will be any different. Sales are currently around 700-800 per month, largely in the developed world, and Canaccord suspects this will be significantly higher in developing markets.

Moelis estimates at least $5m in organic operating earnings (EBITDA) growth is achievable in FY22, largely because of incremental sales from the GPX6000 gold detector.

Around 14% growth in earnings per share over FY21-24 is expected, arising from new products and the opening up of new markets such as South America and India. New distribution channels are also anticipated along with a post-pandemic rebound in tactical radio communications in FY23.

Communications

Canaccord Genuity believes FY22 will be "transformational" for the company's radio communications division as a result of acquisitions and, while smooth integration will be key, believes new capabilities and scale will provide a wider platform to grow.

In FY21 contract deferrals featured in tactical communications as governments elected to direct their funds to fight the pandemic. Hence, revenue in FY21 was around $50m compared with $80m in the prior year.

Nevertheless, the broker notes the order book in FY22 is similar to FY21 and there will be a full contribution from acquisitions. Canaccord Genuity expects revenue growth of 158% and earnings growth of 134% in FY22 for the communications division. Codan will hold its AGM on October 27.

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