Overview: Codan Ltd (“Codan”, “the Company”) is an Australian technology company focused on electronic hardware solutions & equipment. Codan designs and manufactures a range of electronic products and associated software for governments, businesses, aid & humanitarians, and customer markets. CDA’s three main products are Radio Communication Products, Metal Detection Products, and Tracking Solutions. Codan was founded in 1959 and listed on the Australian Securities Exchange (ASX) in 2003.
Catalysts: After experiencing strong headwinds and challenges during the financial year 2014, Codan has restructured the business and significantly strengthened its sales capability and balance sheet. An improved commercial focus and lower cost base delivered double-digit revenue and earnings growth for the past four years. The Company has been debt-free since 2017 and appears on track to deliver record results in the financial year 2019. Codan has a track record of delivering progressive dividend payments to shareholders.
Hurdles: As metal detection sales account for approximately 65% of the Company’s total revenues, Codan is vulnerable to softening demand for gold detectors. Targeting various markets in Africa, Codan is exposed to geopolitical risks and may be subject to political instability which could adversely impact its profitability. Due to the non-recurring revenue sales structure of the business, Codan’s sensitivity to global trade is somewhat elevated.
Investment View: Codan offers profitable exposure to demand electronic equipment in the metal detection and tracking market. We are attracted to the Company’s progress since a disastrous 2014, significantly improved balance sheet, and track record of delivering dividend growth over time. Primary hurdles include geopolitical risks and sensitivity to softening demand in certain key markets in Africa. Targeting a payout ratio of approximately 50%, Codan appears well-positioned to distribute an attractive income component to shareholders for the financial year 2019 and beyond. We recognise the principal risks of the business as well as the chance for a medium-term share price correction, however, believe that the long-term outlook is favourable. We initiate coverage with a buy recommendation.