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Codan: The Benefit Of Diversification

Australia | May 26 2022

This story features CODAN LIMITED. For more info SHARE ANALYSIS: CDA

While some brokers lower price targets, Codan is set to meet FY22 consensus forecasts.

-Codan on track to achieve FY22 consensus estimates
-Diversification strategy yields benefits
-Softness in metal detection offset by communications segment
-Material earnings beat predicted for new acquisitions

By Mark Woodruff

A market update by Codan ((CDA)) has demonstrated the benefits of the company's diversification strategy, as softness in the Metal Detection segment was more than offset by strength in Communications.

The company has a dominant global market position via the Metal Detection business — Minelab — which boasts defensible intellectual property and benign competition, according to Moelis.

The company’s earnings mix has recently been diversified by the recent acquisitions of Domo Tactical Communications (DTC) and Zetron. Strong first year performances from both have lifted Communication’s share of the broker’s FY22 forecast earnings to around 29%.

Zetron provides technology solutions to optimise critical communications and is the second largest end-to-end provider of nextgen 911 services in North America, while DTC’s products build on existing communication solutions for a range of applications including military, security and broadcasting.

With pipelines for Communications 'tracking ahead of schedule', management expects Metal Detection to 'form a new base' in FY22. Macquarie highlights FY22 profit should be the second highest on record and grow from the new base.

Overall, management predicts the second half performance of both segments will be consistent with the first half. This implies to Canaccord Genuity second half profit guidance of $100m.

As this guidance was a -5% miss versus its forecasts, the broker lowers its 12-month target price to $10.60 from $13.60 though notes a credible performance given the numerous headwinds encountered by Metal Detection.

In a very similar adjustment, Moelis lowers its target to $10.60 from $12.23, after reducing its FY22 profit estimate to $100m to align with guidance. Analysts at both firms maintain a Buy rating.

Meanwhile, Outperform-rated Macquarie suggests the company is on track to deliver a record year of profit and meet FY22 consensus forecasts, and maintains its $11.60 target price.

Metal Detection

While gold detector sales into Sudan and Russia were negatively impacted and consumer sales normalised, management still expects the second half earnings contribution from Metal Detection will be similar to the first half. As a result, Canaccord concludes margins have improved, possibly due to price increases.

Management also referred to distribution gains, particularly in North America where there are now over 3,000 points of distribution and a record performance from the countermine technology.


Canaccord forecasts the DTC and Zetron acquisitions could deliver $32m in FY22 earnings versus guidance for $22m when acquired.

As a result of these acquisitions, the analyst estimates the contribution from Communications will have doubled and represent 46% of group revenue and 30% of group earnings in FY22.

In a further positive indication for the growth outlook, management also alluded to positive signs in the developing-world military markets.

Outlook summary

Moelis sees a growing contribution from the recent acquisitions, a return to 'on the ground' business development and exciting prospects from new markets such as South America and India. An expansion of distribution channels toward mass-market retail is also expected to assist.

Meanwhile, Canaccord sees potential for both organic and inorganic growth at Codan.

Communications is now exposed to larger addressable markets, observes the analyst, while Metal Detection should be underpinned by new product development and distribution gains. In addition, balance sheet capacity could support further inorganic growth.

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