Small Caps | 11:30 AM
Optimism dominates the outlook for Codan, also due to a robust pipeline of work.
-Codan's interim results aligned with consensus expectations
-Share price in a sharp downtrend since
-Earnings margin expands, robust pipeline for Kagwerks acquisition
-Management focusing on Communications for growth
By Mark Woodruff
February saw Australian technology company Codan ((CDA)) unveiling interim results in line with consensus expectations, with organic revenue growth in the key Communications segment exceeding management's 10-15% guidance.
Codan develops and manufactures innovative electronic solutions around metal detection, as well as for communications such as high-frequency and land mobile radio systems for military uses and emergency response systems.
First half revenue and earnings (EBIT) grew by 15% and 20%, respectively, year-on-year to $305.6m and $65.8m, with earnings growth in the Communications and Metal Detection segments of 31% and 9%.
In Communications, earnings (EBIT) margins expanded by 200bps to 27% with the company reiterating long-term margins should reach more than 30%.
Management continues to target 10%-15% organic revenue growth in this segment, with total revenue growth expected to exceed this range due to the -$36m Kagwerks acquisition in FY25.
This transaction aims to transform the military communications business into a full solutions provider, given Kagwerks is a leader in tactical operator-worn communications technologies.
So, what explains the negative share price reaction to interim results?
Explanations vary. Bell Potter blames the absence of a material update regarding potential acquisitions, while UBS felt management's unchanged growth expectation for the Communications segment implied to the market a material second-half slowdown.
Such fears are unfounded, suggests UBS, given the 26% increase on the previous corresponding period in the Communications order book to $231m.
Analysts at Canaccord Genuity agree, believing forward commentary for the Communications segment should be assessed in conjunction with organic order book growth, which implies segment revenue growth for the year well in excess of 15%.
By undertaking acquisitions in Communications, the company has reduced its reliance on the Metal Detection/Minelabs segment, highlights Bell Potter, with the revenue split transitioning to 40%/60% (Metal Detection: Communications) in FY24 from 75%/25% in FY21.
Previously, covid disruptions and political instability in the key Metal Detection market of Africa resulted in a substantial fall in revenue, explains the broker, and exposed the company's over-reliance on this region.
Today, Codan has a higher proportion of revenues from North America and Europe (70% combined), with a lesser 15% exposure to Africa and a greater number of high-quality customers, including government organisations and large corporates.
Other customers include defence, small-scale miners and individual customers.
Communications segment
The Communications segment consists of two separate divisions: Tactical Communications and Zetron.
Tactical Communications offers solutions to a wide range of markets, including military, unmanned systems, law enforcement, intelligence, broadcast, commercial, and non-government organisations, while Zetron provides comprehensive command and control software, specialising in mission-critical data processing and response management.
Zetron's Land Mobile Radio (LMR) solutions ensure reliable communication across all terrains.
Bell Potter notes the predictability of earnings in the Communications segment is largely supported by Zetron, as a significant portion of revenue is derived from long-term support contracts.
True to form, Zetron was a key driver of first-half performance, highlights Moelis, with growth underpinned by a contract with the US state of Iowa, where the Net Generation 911 ("NG911") services are now provided to more than 90% of 911 calls.
The overall Communications division delivered 31% earnings growth, off the back of 22% organic revenue growth and very strong margin expansion, explains UBS.
The first three months of ownership of Kagworks have been positive, notes Macquarie with strong integration progress, a robust sales pipeline, and a $16m order book.
Regarding the overall Communications segment, this broker observes the outlook is supported by a strong order book of $247m, a rise of 35% year-on-year, driven by a robust Tactical Communications order intake.
Around 72% of the company's total engineering investment is now directed towards Communications, consistent with management's future growth strategy, explains Macquarie.
Metal detection (Minelab) segment
Codan has elevated Minelab above its competitors as a global leader in hand-held metal detection, explains Bell Potter.
Across FY15-FY20, Africa was a major market for Minelab, but political instability in the broader region and a post-covid reduction in demand has contributed to a significant fall in African-related revenues.
Elsewhere, the analysts note markets in Rest of World have remained resilient, supported by new product releases and an expanding retail footprint.
Interim Detection revenue of $115m was up by 5% year-on-year due to increased African revenue, with Minelab Africa revenues rising by 48% to $45m.
A mix shift toward Africa versus Rest of World helped deliver favourable margin outcomes, explains Moelis.
Dividend and balance sheet
The board declared a fully franked interim dividend of 12.5 cents, a rise of 19% year-on-year.
Net debt increased by $48.7m to $124.1m on the back of acquisition funding and working capital build, explains Canaccord.
UBS posits Codan's robust balance sheet and new $200m debt facility also provides support for cash EPS/valuation accretive M&A.
The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE
If you already had your free trial, why not join as a paying subscriber? CLICK HERE