Codan’s Communication Upside

Small Caps | Jun 18 2024

Codan has surprised with the performance of its metal detection business, but it is the company's communications business that has brokers excited.

-Codan moves to high quality status
-Solid organic and inorganic growth opportunities in communication
-Stellar margin expansion underpins valuation

By Greg Peel

"Whether you're on an outdoor adventure, an artisanal miner looking for gold or a humanitarian organisation clearing land mines in the world's most challenging environments, our metal detectors give you the range, depth and reliability you need to change your fortune."

Codan ((CDA)) has best been known as a company selling metal detectors via its MineLab business, as the above statement from the company's website attests. But Codan also develops and sells radio communication solutions across the globe. This division took a big step up in 2021 when Codan acquired US companies Zetron and Domo Tactical Solutions (DTC).

If MineLab provides for clearing land mines in the most challenging environments, Codan Communications develops technology solutions to solve customers' communications, safety, security and productivity problems in some of "the harshest environments around the world", again according to the company's website, providing tactical communication solutions that enable its customers to be connected, ultimately to support critical missions worldwide.

Codan's customers include the military and special forces, intelligence agencies, border control and first responders. Long term customers include more than 20 key US government agencies as well as the "Five Eyes" intelligence communities.

Codan's products are sold in more than 150 countries, with a global network of dealers, distributors and agents that allow the company to deliver solutions anywhere in the world, whenever needed.

Upside Surprise

Back in February, Codan surprised with its first-half FY24 result, leading to a share price pop of around 24% on the day. While the beat was ascribed mostly to better than forecast revenues and 49% growth in the metal detection business, brokers remained focused on the growth potential of the communications business.

Canaccord Genuity noted at the time the business was becoming "high quality" and the communications segment is "key". Canaccord retained its Buy rating and lifted its target price to $10.83 from $8.17.

Moelis lifted its target to $10.22 from $8.52 but stuck with a Hold rating given the share price pop meant valuation was by now less attractive.

Not to be outdone, Macquarie lifted its target to $10.65 from $8.48, and retained Outperform.

Earlier this month, Macquarie pulled its rating back to Neutral, given the share price had now rallied some 31% from the first-half result release, bringing it within 10% of the broker's total shareholder return valuation. But Macquarie had nothing but praise for the company.


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