Codan’s Technology Signals Strong Outlook

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-Robust demand for mining technology
-Daniels acquisition widens market
-HF communications market enduring
-Codan on track for strong earnings
 

By Eva Brocklehurst

Moelis has taken a look at Codan ((CDA)), a company that manufactures a diverse range of high value electronic equipment. It makes gold detectors, so it's been busy. However, it's in the field of radio communication that the company sustains its momentum, albeit not as exciting but very important.

Codan acquired Daniels Electronics for $24 million in August this year. According to Moelis this acquisition has provided substantial synergies and the ability to roll out Daniels' solutions across Codan's global distribution network. Cross-selling opportunities also exist with Daniels' established network of radio communications in North America. So, it's a major step up in increasing global business. Moelis was told by management that, to date, the acquisition is performing to expectations from an operational perspective, with a pipeline of opportunities for FY14 that is well ahead of initial forecasts.

Codan has three key business divisions; radio communications, metal detection and mining technology. According to the company, the acquisition of Daniels heralds a transition beyond its high frequency systems to a wider communications solution. Daniels provides the opportunity to enter the land mobile radio (LMR) market with a competitive and established product line. Codan's high frequency radio transceivers and encryptors – perhaps a bit more pedestrian than GPS or new mobile telephony – are nevertheless widely used and very much needed for organisations involved in emergency, remote and military communications.

Metal detection, which accounts for 55% of revenue, is where Codan's Minelab business finds a growing customer base. It is the supplier of hand-held prospecting units to all those treasure hunters out there. Also, Minelab's gold detectors have advanced features specifically for serious gold prospectors and claim to find gold deeper than any other detector. Sales of these products have grown substantially with sales of gold machines for the artisanal market very strong in Africa. Moelis has been told by management that a number of large gold finds in Sudan underpinned the strength in artisanal gold product sales recently. Following on from this, sales of these products are now happening in Guinea, Nigeria, Tanzania, Cameroon as well as South America. Minelab also has a more sober side to its business. It has developed its metal detectors technology for application in humanitarian de-mining, unexploded ordnance clearance and counter-mine operations.

Mining technology, the company's third segment, is via the Minetec business, acquired in January this year. Here, Codan provides technology to the coal mining and oil and gas sectors with the likes of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and WorleyParsons ((WOR)) among the client list. Products include messaging systems, Wi-Fi solutions, tracking and proximity detection and mining camp entertainment. Entertainment? Yes, supplying TV and radio services to the increasing number of self-contained and remote mining villages that are being built. According to Moelis, mining technology provides around 5% of revenue but offers another strong area for growth given its specialisation in mine productivity.

Moelis said Codan's net profit in the first half of 2013 is expected to be around $25m against $10.4m in the prior corresponding half. This follows growth of 19% in FY12. Despite the uncertain global environment and lumpy nature of project contract revenue, Moelis notes FY13 profit guidance of $40m, would represent over 40% growth if realised. The broker views the FY13 price/earnings ratio of 10 times and a dividend yield of 5% or more as undemanding, despite a more than doubling in the company's share price in 2012. Moelis has rated the stock a Buy with earnings growth of 31% forecast for 2013. The broker's target price is $2.70 (current $2.37). 
 

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