Codan Limited

CDA Details

Contract Secured by Subsidiary: Codan Limited (ASX: CDA) is engaged in designing, manufacturing, and marketing several high value-added electronics products for global government, business, aid and humanitarian, and sophisticated consumer market. Recently, the company’s wholly owned subsidiary, DTC Communications Inc (DTC), has won a multi-year contract from Fitch AAA credit-rated global technology corporation to supply DTC software-defined mesh radios to a publicly listed as part of a sensitive military program.

• DTC received initial purchase order of US$28.2 million (approximately AUD 37.6 million), which is to be e delivered in the upcoming 12-month period. Out of the said order, 60% is likely to be delivered in FY22.
• As per CDA management, the contract is consistent with its strategy to grow its business by successfully delivering communications solutions to the security and military sectors globally.

FY21 Financial Summary:

• Growth in Sales and NPAT: During the year, the company achieved the highest ever sales of $437 million in its history, reflecting a rise of 26% over FY20. Underlying NPAT for the year rose by 52% to $97.3 million. This outstanding growth was aided by rising sales in the gold detectors and recreational metal detectors in most of its markets because of its strategy to strengthen and invest in the core business via launch of new products.
• Growing Sales in Segment: The company earned 75% of its sales from the metal detection business, which delivered another record sales year in both recreational and gold mining.
• Acquisition of Two Businesses: During FY21, the company spent around $174 million for the acquisition of the Domo Tactical Communications (DTC) and Zetron businesses, and the integration of the same will be in FY22 into the communication segment.
• Increase in Shareholders Return: CDA declared a fully franked final dividend of 16.5 cents per share, which took the final dividend to 27 cents for the FY21, reflecting a rise of 46% over FY20.

Full-Year Dividend (Source: Analysis by Kalkine Group)

Key Risks:

• Technology Risk: The company’s business could be impacted by the shift in new technology within the industry; hence, its operational performance could be at risk.
• Cyber Security Risk: CDA is exposed to a material business risk, which arises from failure in maintaining cyber security.

Outlook:

• The company is optimistic about another successful year in FY22, backed by a strong start to the year and in line with the FY21 run rate. The demand for its metal detection products is likely to be strong.
• CDA would continue with its strategy of making investments in new product development as well as to seeking opportunities to bolster profitability by expanding into related businesses offering complementary products and technologies.

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: After spending circa $174 million for acquisitions, the company closed FY21 with excellent cash generation with zero net debt. The stock of CDA is trading below its 52-week low-high average of $9.200 - $19.430 respectively. The stock has been corrected by ~18.33% and ~39.47% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 disruptions, high debt-to-equity ratio, and rising cash cycle days. For the purpose of valuation, peers such as Iress Ltd (ASX: IRE), Link Administration Holdings Ltd (ASX: LNK), Ava Risk Group Ltd (ASX: AVA), and others have been considered. Considering the expected upside in valuation, rising topline and bottom line, synergies from recent acquisitions, contract secured by its subsidiary, decent outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the current market price of $10.020, as on 28 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CDA Daily Technical Chart, Data Source: REFINITIV 

EML Payments Limited

EML Details

Acquisition of Sentenial Limited: EML Payments Limited (ASX: EML) is in the provisioning of prepaid payment services in Australia, Europe, and North America. Recently, the company has wrapped up the acquisition of Sentenial Limited and its wholly owned subsidiaries.

• The acquisition was completed on an upfront enterprise value of €70 million (A$112.7 million) plus an earn-out component of up to €40 million (A$64.4 million).
• As a result of this, the company’s payment offerings will be expanded and include alternate (non-card, non-scheme) digital payment products to its platform to address customer demand, complementing its card scheme-based payments.
• On 7 October 2021, the company advised the market that its Irish regulated subsidiary, PFS Card Services (Ireland) Limited (PCSIL), has received further correspondence from the Central Bank of Ireland with respect to the regulatory concerns in relation to PCSIL and potential directions.
• EML believes that the directions could materially impact the European operations of the Prepaid Financial Services business

FY21 Financial Summary:

• Surpassed Revenue Guidance: During FY21, the company recorded a growth of 60% in revenue to $194.2 million over FY20, which surpassed the guidance range of $180-$190 million. The increase in revenue was backed by the growth of revenue in the GPR segment.
• Growth in Underlying EBITDA: Backed by the growth of 42% in gross debit volume (GDV) for the year to $19.7 billion, the company’s underlying EBITDA soared by 65% to $53.5 million, which was at the top end of the guidance range of $50-$54 million.

Gross Debit Volume (Source: Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company’s business is exposed to a more complex regulatory environment; any non-compliance could lead the business to fines, penalties, etc.
• Credit Risk: EML’s financial performance could be impacted by the failure of fulfilling obligations by the counterparties.

Outlook:

• For FY22, the company expects revenue and underlying EBITDA in the range of $220-$255 million and $58-6$5 million, respectively.
• Gross Debit Volume for the upcoming year is likely to be in the vicinity of $93-$100 billion. In addition, it anticipates an increase in the cost base due to new roles in Europe to address CBI matters, higher insurance costs, and internal & external audit fees.

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 company closed FY21 with a strong financial position, evident by a rise of 19% in cash balance to $141.2 million as compared to $118.3 million as on 30 June 2020. The company is trading below its 52-week low-high average of $2.470 - $5.890, respectively. The stock of EML has been corrected by ~24.09% and 18.87% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the negative ROE, low EBITDA margin and regulatory risk associated with Central Bank of Ireland. For the purpose of valuation, peers such as Bravura Solutions Ltd (ASX: BVS), Pushpay Holdings Ltd (ASX: PPH), Credit Corp Group Ltd (ASX: CCP), and others have been considered. Considering the expected upside in valuation, growing revenue, increasing GDV, growth in underlying EBITDA, strong financial position, decent outlook, current trading level, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.875, as on 28 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

EML 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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