One of the perks of being a Strawman member is that I get access to the CEO interviews they do regularly. I’m pleased to share some key takeaways from the recent acquisition with Codan CEO, Alf Ianniello (with Strawman’s permission.) These notes should be thought of as an addendum to my longer article on Codan published just three months ago on 24th of April 2022, titled Why I Bought Codan (ASX: CDA) Shares.
As a quick reminder, 2021 was a big year for Codan, since it acquired Domo Tactical Communications and Zetron in May and sold Minetec to long-standing partner Caterpillar. On top of that, the long serving CEO Donald McGurk sold shares and quit. Following that, the share price fell from over $17 to under $7.
When I bought Codan shares, I thought that it would make $90m in FY 2022 profit with a run rate of around $40m per half. My view was that the acquisitions would perform as expected and that the Minelab business would be weak. This turned out to be too conservative, because Codan recently told the market that the board is expecting at least $100m in profit. Furthermore Codan’s cash flow, which was weak in the first half due to inventory build up, is expected to be much stronger in the second half.
On the Strawman interview, Alf Ianniello spoke positively about the recent acquisitions, saying “the two acquisitions we actually have completed will exceed the market expectations”. My guess is that the communications business came in stronger than I thought it would, and probably the Minelab business is still weak, as expected.
Previously, I had assumed that a higher gold price would be good for Codan. However, on the call Alf Ianniello said that investors should think about the small scale artisanal mining segment as small businesses. They usually rent detectors from a distributor. They have costs, such as the price of fuel, and they have a gold price which influences their revenue.
Extrapolating from these comments, I suspect that this segment is quite weak, since fuel prices have been high, and the gold price has been lacklustre. On the upside, Alf Ianniello mentioned that Minelab can essentially create new markets through introducing their technology to areas where people are using more basic techniques.
In the second half of FY 2021, Codan made about $189m in sales at Minelab, but in H1 FY 2022, it made only $138m in sales. There’s no doubt that FY2021 was a remarkable year for Minelab, with stimulus driving demand from hobbyists. But because sales are one-off in nature, profits can fluctuate considerably, depending on demand from year to year.
The communications segment is expected to be a little more predictable, though obviously it can grow or fall from year to year. One possibility is that the segment will benefit from geopolitical unrest, and the CEO did suggest that they were seeing interest as a result of the conflict in Ukraine.
Overall, the business doesn’t necessarily generate steady profits, but it should generate good net profit margins, probably over 15%, even in tough times. Alf Ianniello said; “We have pricing power, we can increase prices in the market, from a Minelab perspective. Our contracts in Zetron and tactical communications do allow us to have inflationary clauses”.
Historically, Codan has had some periods with net profit margins below 10%, though this may have been related to the fact that the company was hacked in FY 2014. That had a bad impact on their metal detection business in the subsequent few years. Either way, it’s safe to say that Codan has a long history of profitability, despite the various vicissitudes of its industry, discussed previously.
I won’t update my valuation of the stock until after the upcoming results, but I appreciated the opportunity to hear from Alf Ianniello. My impression from the presentation was that Codan should have reasonably steady profit margins, and some degree of long term growth, even if revenue goes up and down a bit.
This post was contributed by Claude Walker. Check out the A Rich Life Ethical Equities column for more of his articles.
Please remember that these are personal reflections about stocks by an author, and this article is not intended as a recommendation. The author owns shares in Codan and will not sell for at least 2 days after publishing this article. This article is not intended to form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. Any statements that are advice under are general advice only. The author has not considered your investment objectives. Any statements that are advice are authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).