The quality company we are talking about is Codan Limited (CDA). CDA is a company founded in South Australia operating two divisions:
- Metal Detection – sold under the Minelab brand. Metal detectors are sold to too to main groups: Small artisanal gold prospectors in developing countries (Africa) and recreational users / Treasure hunters in search for gold or buried treasure.
- Communications – sold under different brands such as Codan, DTC, and Zetron. Communications equipment is sold to governments, emergency responders, and the military. The DTC and Zetron business are recent acquisitions, acquired in early 2021 for $170M.
A quick look at the share price performance since June 2021 shows the share price has fallen from $19.50 to close at $9.32. So, the question has to be asked why has the share price has dropped. There are a few reasons:-
With over 11 years as Managing director and with the company for more than 20 years, Donald McGurk announced his retirement. Donald McGurk grew the business steadily over many years but a change at the top of business leadership is not always positive. No one likes to change a steady pair of hands for an unknown.
The other reason the share price has been marked down is concerns around growth. Can the growth of previous years particularly in the metal detection division continue?
Growth in the Metal Detection division has been impressive over the last few years. Even covid lockdowns did not slow growth. Instead, with metal detecting being a social distance pursuit and people having time on their hands, metal detection was taken up in ever more significant numbers.
Codan has invested heavily in R&D, spending $30M p.a, this spending will support growth now and into the future. So growth may slow in the future but will still continue.
Despite the risks mentioned above, there is a lot to like
- The company is trading on a P/E of 13.3x earnings
- Low debt levels even though the company spent $170 Million in early 2021 to expand its communications business
- Even though growth may slow in the metal detection business in coming years, growth is still likely in the high single digits
- Communications business suffered from lower sales as governments switched spending to covid stimulus. With covid stimulus spending now on the declining expenditure will be directed back to communications equipment.
- Codan increased inventory levels at the right time and has not suffered from supply problems that affected competitors
- Recent trading update on the 25th January while lite on details showed growth unaudited sales achieved in the first half of FY22 were $257 million, an increase of 32%. The net profit after tax is expected to be around $50 million, increasing 21%. The release of the information should de-risk the shares until the outlook for the second half is released on the 17TH February.
In a market that has switched from growth to value companies in the last month, Codan has a solid balance sheet with an excellent track record of growth over many years, and the current and future, P/E looks cheap even if growth was too slow.
Trade Action
Entry: Buy 500 CDA paying no more than $9.50
Stop loss: $7.50
Target: $13.50
This time around because of the risk posed by the upcoming earnings season we are taking a smaller position to start with. If the guidance from the company is positive when they next release information on the 17th February 2022 we will look to add to the position.