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Codan exceeds expectations yet again

Metal and Gold Detecting company Codan (ASX:CDA) is a top ten position in The Montgomery [Private] Fund and just outside the top ten in The Montgomery Fund. It has been a holding for several years after being picked by Andreas Lundberg and purchased …

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Metal and Gold Detecting company Codan (ASX:CDA) is a top ten position in The Montgomery [Private] Fund and just outside the top ten in The Montgomery Fund. It has been a holding for several years after being picked by Andreas Lundberg and purchased between $2.86 and $3.35. Last week’s half-year report again exceeded expectations while re-confirming its status as a high-quality company.

Figure 1.  Codan Share Price to February 18, 2021 and Montgomery purchase price.

Codan last week reported strong 1H21 results with net profit after tax (NPAT) of $41.3 million (about $1.5 million stronger than our estimate) and driven by continued outperformance in Metal Detectors.

What was surprising to us was the mix. The Communication division was weaker than we had anticipated but Metal Detection was materially stronger. Given the metal detection business is the main value driver this is a positive.

And while the Communication division was not as strong as expected, investors understand it is a project-based business and was adversely impacted by COVID-19 travel restrictions, which limited the ability for sales staff to engage with customers.  Since the end of the first half year, a rebound has been reported and the company is guiding FY21 sales of A$80-90 million.

Metal detection sales grew by 55 per cent in 1H21 and this is before the launch of a new high-end gold detection machine. The second half will be boosted by the release of the GPX6000 (Gold) in the third quarter with sales following in the fourth quarter.

The company also commented that the first month of the second half was the strongest ever with $35 million in sales. Given the first half run rate was $26 million per month, this implies the Metal Detector sales run-rate is improving from record 1H21 levels.

On our numbers, we estimate Codan’s shares are trading on about 26x FY21 earnings and circa 22x FY22.  While this is a premium to the overall market, the company is sustaining stronger growth rates.  It’s also the case that sales growth in Recreational detectors (+66 per cent) is outperforming specialist Gold detectors (49 per cent), and while the recreational segment is smaller than Gold, if the company can continue Recreation’s faster growth sell-side analysts could take a shine to its steadier reliability and reduced sensitivity to the gold price. The easier ‘forecastability’ might then lead to a rise in the acceptable multiple at which the stock trades.

The other key observations from the result was an understanding that both product extension and expansion geographically will continue. This is reassuring because it potentially offsets the possible softening of demand after COVID-related lockdowns, border closures and travel restrictions end. As mentioned earlier, Codan also noted the Communication business commences the second half with a solid order book.

Finally investors should be aware that the company announced a material acquisition of 100 per cent of US-based Domo Tactical Communications, for up to A$135 million ($114 million upfront and $21 million in earn-outs) and fully funding from existing cash reserves, just two days prior to its results.

Domo Tactical Communications is a high bandwidth wireless communications equipment supplier. Codan reported the acquisition of Domo will be earnings accretive immediately, generating estimated revenue of $90 million and profit before tax of nine million dollars in FY22. Margins are lower than the existing business however synergies should be found to mitigate the reduction. Completion is expected in 10 weeks, by April 30.

As with the growth in recreational metal detectors, the acquisition of Domo could eventually be viewed very positively by the market as it diversifies the company away from gold detector sales.

The Montgomery Funds own shares in Codan. This article was prepared 19 February with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Codan you should seek financial advice.

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