Codan Limited

CDA Details

1HFY22 Results in Spotlight: Codan Limited (ASX: CDA) develops technology solutions to address security, communications, safety, and productivity problems in difficult environments globally. CDA operates two divisions of Communications and Metal Detection.

• The sales increased to ~$256.75 million in 1HFY22 versus ~$194.47 million in 1HFY21, up by ~32% YoY.
• The company posted a record half-year NPAT of ~$50.1 million, up by ~21% YoY for the first six months ended as of 31 December 2021 in its operating history.
• CDA declared a fully franked interim dividend of ~13.0 cents per share (cps) in 1HFY22 compared to ~10.5 cps in 1HFY21, up by a ~24% increase. The record date of the dividend is 24 February 2022, and the payment date is set as 10 March 2022.
• Increase in Inventory Levels: In early CY21 and during 1HFY22, CDA consciously decided to invest in increased inventory production capacity to meet the future demand. This decision had an impact on cash flows. CDA reported a negative working capital at the start of FY22 because of prepayments made from multiple large customers in the previous year to secure supply. Hence, CDA decided to invest an additional ~$65 million in working capital in 1HFY22 due to the negative working capital situation, almost record sales in December 2021, and to position Zetron and DTC (Domo Tactical Communications) acquisitions on the growth track.
• The net debt declined from ~$48 million in December 2021 to ~$38 million in January 2022.
  

Half-Yearly Dividend Growth Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of technological changes, integration of synergies from DTC and Zetron acquisitions, and cyber security attacks. It needs to develop its proprietary technology and safeguard it from infringement.  

Outlook:

• Both the newly acquired businesses of DTC and Zetron have surpassed the initial full year profit expectations. With fruitful integration and growth of these acquired companies, CDA expects to achieve a more balanced sales portfolio across the group.
• CDA continues to transform the Communications division from a product-centric business to a full solutions provider. The division has an orderbook of ~$163 million out of which ~$71 million is expected to be shipped in 2HFY22.
• The CDA board plans to continue the dividend pay-out ratio in the order of ~50% of its profits.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of CDA gave a negative return of ~21.01% in the past three months and a negative return of ~49.63% in the past six months. The stock is currently trading near its 52-weeks’ low level of $7.060. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median P/E multiple, considering the rebalancing required in the inventory levels and cashflows, supply chain, & integration risks. For this purpose of valuation, few peers like Elsight Ltd (ASX: ELS), EROAD Ltd (ASX: ERD), Senetas Corp Ltd (ASX: SEN) have been considered. Considering the current trading levels, decent financial results in 1HFY22, an improved orderbook for Communications division, growth in DTC and Zetron businesses, a more balanced portfolio split between Minelab and Communications, and indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $7.270, as of 25 February 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CDA Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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