Codan Limited today announced that they expect to outperform their FY18 profit guidance of $20-$25m. It was reported in the announcement that the Company will likely achieve a first half profit of around $15 million and that historically their second half profit exceeds that of the first.
I have been following Codan for some time and started buying in the past few weeks. Here are the reasons why Codan appealed to me as an invest-able Company:
1. The valuation is appealing
At the current price Codan trades at around 5 times EV/EBITDA and a price/earnings of circa 9 times. Acknowledging that the Company has experienced lumpy earnings over the years, these metrics are based on what management refer to as their “base-level” business and seems quite conservative.
2. Codan have been in business for over 50 years
The business was founded by three university buddies in 1959 and one of the founders is still the Company’s largest shareholder. This says to me that management and the board are experienced and prepared for changes in business cycles, as they have likely seen many over the years. Additionally, governments often look for long-standing ownership and management when awarding contracts because stability is an important factor given that government approval process can be lengthy, and trying to shift suppliers quickly if one were to fail to perform is difficult. Not surprisingly, Codan has standing contracts with the United States government, supplying military communication equipment.
3. Diversified portfolio of products
Last year’s record result was primarily attributed to their Minelab metal detectors and the overwhelming demand received from their expansion into the African market. Before making the decision to invest, I thought I would drop into the local gold prospecting equipment retailer and see what I could find out. The veteran shopkeeper had nothing but good things to say about the Minelab products, including their innovation, durability and after sales support. In his opinion they are the best currently on the market.
Other products include radio communication and defence electronics, but what I find more exciting is Minetec, a real-time underground scheduling and monitoring system that improves safety and productivity.
Recently there was speculation that the Company had landed a large mining player as a new Minetec customer, but the Company responded by saying that there were in negotiations but no agreement had been formed as yet.
4. Strong balance sheet
After a bumper result in FY17, the board decided to payout the excess cash generated to shareholders via a special dividend. Total dividends paid for the year were 13 cents per share. Given that the Company has no debt, another stellar result will likely result in the same outcome. Moelis seem to have the same opinion in their research report, forecasting a full year FY18 dividend of 10 cents per share or 4.6% based on yesterday’s closing price. Oh, and did I mention the Company has no debt.
I don’t think there is a lot of downside here, and that the only reason the share price isn’t higher is that this is a lesser known Company in what most would consider a boring industry.
It seems I am not the only one with this opinion, Cannacord Genuity recently produced a research report forecasting a full year 2018 net profit after tax of $31 million and I tend to agree, maybe even slightly higher. Like Moelis, Cannacord’s price target is $2.60.
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