Small Caps | 11:00 AM
Codan's growth in FY26 surprised even the most upbeat, prompting material earnings upgrades, but what about the valuation?
- Codan’s defence communications growth accelerates
- DTC and unmanned systems drive opportunity
- A robust balance sheet offers inorganic growth opportunities
- Share price quintupled over past three years
By Danielle Ecuyer
In the slipstream of global growth trends
August reporting season has finished.
As articulated by Macquarie, the results threw up a distinctive trend: the emergence of “two economies”, or a two-speed domestic backdrop.
On one hand, businesses which are consumer facing are experiencing more challenging conditions, with weakening household-related activity as higher interest rates bite alongside a slowdown in the housing sector.
In contrast, businesses exposed to infrastructure, defence, mining services and data centre investment remained more resilient.
An increasingly divided economy is serving up equally divergent share price performances and earnings outlooks.
Codan ((CDA)) was one company whose shares, post-earnings release, rallied over 12%. The shares have appreciated 72% year-to-date.
Just how good were those FY26 results?
Canaccord Genuity didn't mince its words: FY26 results were “impressive” and reflected ongoing “rapid growth”, including better margins and cash generation above expectations.
As analysts dive into the financial details, the question investors may want to consider is how much does one pay in terms of valuation for a high-growth story that has already put some big runs on the board?
Stripping down the financial metrics, 2H26 net profit after tax rose 81% on the previous year and 41% on the prior half.
The Canaccord analyst estimates gross cash conversion of 109% for FY26 y/y, up 262% in 2H26 on 1H26. The robust result allowed management to finish the fiscal year in a net cash position of $36m versus a forecast -$45m net debt.
Digging a little deeper into the heavy lifters, Moelis observes both Communications and Metal Detection continue to perform strongly.
For UBS, the record FY26 results saw Communications beat expectations by 6% and Metal Detection by 3%.
Management highlighted “unprecedented” levels of demand, as well as the forward order book for Communications, up 50% y/y to around $380m.
Ord Minnett highlights Communications revenue rose 22% to $506m, including defence/tactical and Zetron, the public safety business.
The primary demand emanated from defence and unmanned radio systems applications.
Unmanned revenue more than doubled to around $215m over the full year, with $140m generated in 2H, while the added positive is unmanned revenues are higher margin.
This is where the structural growth opportunity for Codan becomes interesting.
At the forefront of modern warfare development
Prior to FY26, Macquarie had a Buy-equivalent rating and $48.50 target price, up from $44.20. At the time, Macquarie detailed NATO’s announced “Drone Edge” initiative, incorporating US$40bn-plus of investment from 30-plus allies in drone and counter-drone capabilities.
The estimated total addressable market of US$5.6bn-US$11.2bn assumes circa 6%-12% wallet share, weighted towards lower-cost, mass-produced drones. Macquarie believes the “true opportunity is materially larger”.
From the Codan perspective, Domo Tactical Communications’ (DTC) BluSDR portfolio is viewed as well positioned to benefit from the structural move to mass-produced drone usage.
Macquarie states its BluSDR radios have a technical advantage over other competing military equipment, as they are smaller, lighter and more power-efficient communication systems that can operate under electronic warfare conditions. The price is also lower than competitors'.
Canaccord believes the recent US tariffs put Codan in a robust position, with defence/tactical comms being NDAA compliant.
While Zetron’s 1H26 was impacted by the US government shutdown, there was an improving trend in 2H26 and a 25% increase in the order book by the end of the year on FY25.
Bell Potter pointed to management’s indications there were emerging constraints in some parts of the global electronics supply chain, arising from record and previously unseen demand.
Depending on the supply chain, Codan expects Communications 1H27 to well exceed 1H26 results.
Management has guided to 20% growth for FY27, above the long-term target of 10%-15% and 14%-plus above consensus forecasts prior to the results.
Record gold prices and new products
Turning to Metal Detection, revenue growth of 42% and profit before tax growth of 65% were achieved, with Minelab launching four new products over FY26 in the gold, recreational and countermine markets.
Management also expanded its distribution and retail exposure in Australia and North America. As noted by Ord Minnett, the new products will have a full-year contribution in FY27.
Moelis highlights sales in Africa and the rest of the world are tracking in line with 2H26 run rates, and the overall 2H26 run rate was around $32m, 15% above 1H26.
Peeking into margins, Canaccord points to the Communications margin uplift of 470bps on the prior year and Metal Detection margins up 630bps.
While overheads also rose “quickly”, the analyst emphasises the rate of earnings growth exceeded the higher cost imposts, underpinning positive operating leverage.
For UBS, the attraction lays in exposure to three positive global thematics: the gold price, global defence investment and public safety.
All three end markets are forecast to help generate a compound average growth rate in EPS of 18%-plus over the next three years.
The robust cash generation is equally opening up another avenue for growth.
Canaccord believes the free cash flow generation and robust balance sheet pave the way for management to pursue accretive M&A.
Codan has a $250m debt facility and $150m accordion, meaning the debt facility can expand.
Which brings us back to valuation.
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