It seems like we haven’t found the bottom for Codan yet. @markeewan, I don’t know if you follow this one, but I’d love to see your Technical Analysis for Codan if you have one. You could save me buying more shares too early!
Another very insightful post from Bear 77.who obviously enjoys a very good knowledge of Codan's operations.
Codan's share price performance since it hit is peak at $19.43 in May last year is frustrating for those of us who have held the shares for a number of years. However, if the thesis is largely unchanged and the company keeps on producing good results then you have to believe that the irascible, and sometimes irrational, Mr Market is having another one of his brain fades.
The table below shows Codan's performance for the last six years. One would suggest that compound annual revenue growth of 20% and profit growth approaching 40% over this period is right up there. Added to that we have a Return on Equity which, having shown a healthy rise over the years, is now in the mid-thirties, meaning that we are talking about a quality company. The company is generating healthy levels of cash as can be seen at both the operating and free cash flow levels. (Note: free cash flow for 2021 excludes the cost of the businesses acquired - accountants have there own ways of doing things - but for mine free cash flow should exclude the cost of acquiring assets which will generate new streams of income).
Of course all of the foregoing is just history and it is the future with which we need to concern ourselves. On that subject: the recent interim results (refer below) don't seem to suggest the business is stagnating or is about to fall off a cliff and the recent acquisitions are reported to have been bedded in satisfactorily and to be performing well.
The circumstances which have caused the market to fall out of love with Codan have been well documented by Bear 77 but the company's commentary accompanying the very satisfactory interim results seem to suggest the future is far from the doom and gloom the share price performance suggests.
Unless there is some fact, or facts, that have yet to be shared with the market or something I have missed I struggle to see why this company is trading at a PE of around one-half of the market average.
I think I hit a nerve with that post on Sudan so I am posting in the forum rather than starting a new straw.
Actually I hold this in my real portfolio and I added at higher prices so I'm at a small loss. I made the mistake of not looking at Sudan more closely.
Since signing up to Tikr, I've been able to access the analysts' transcripts and now have a better picture of what is going on.
I'm only holding because I still believe management can work on growing in other countries such as Europe and Brazil while the Sudan situation plays out.
Also, given the negative experience I had investing in Aquarius Platinum during the Mugabe era with hyperinflation in Zimbabwe, I think the situation in Sudan seems similar and may take more than a year to resolve. Plus Sudan is also now fighting rising inflation with food shortages caused by grain shortages from the war in Ukraine. Right now maybe it is not as serious as Mugabe in Zimbabwe but still it is a worse case scenario.
More significantly, Codan hasn't put out any guidance for the FY. I think this is another point that has weighed down the share price. Until we get some positive guidance (eg: like the one issued by Elders), I believe the share price will continue to drift.
There are four main factors playing into Codan's downtrend, in my opinion (in addition to gold price movements).
- Donald McGurk, their highly regarded CEO & MD having recently retired (in March, i.e. last month), which they announced in August last year (18-Aug-2021) - see chart below.
- Afghanistan. On the same day (18-Aug-2021) along with their full year results (for FY21), Codan give some commentary around the Taliban rapidly taking back control of Afghanistan after the US withdrawal - they said, "One of the great strengths of the Tactical Communications business has been our ability to deliver communications solutions to customers in difficult and diverse environments, one of these markets in recent years has been Afghanistan. During FY21, sales into Afghanistan made up 9% of our Communications business. Given the developments in Afghanistan our sales team will continue to focus on the other markets in the Central Asia region." It was therefore expected that they would sell virtually nothing into Afghanistan from that point. However Afghanistan represented 9% of their Communications Division sales and that division represented 22% of their FY21 Group sales revenue (with their larger Metal Detection division generating 75% of FY21 sales and "Tracking Solutions" accounting for the remaining 3%), so that is 9% of 22%, so a bee's whisker under 2% of Codan's total FY21 Group sales revenue was generated from sales into Afghanistan. The argument may have been that their Communication division was expanding due to both acquisitions and organic growth and that some analysts or investors may have expected Afghanistan to become a larger market for Codan in FY22 and future years, and that had now all gone pear-shaped. But it was only 2% of sales at the time.
- Sudan. We've talked about this, so I won't repeat it, suffice to say that Sudan had previously represented a significant source of revenue for Codan's Metal Detection division sales (which was almost all Minelab gold detectors; Minelab gold detectors are regarded as being the best gold detectors in the world by many, certainly they are right up there in terms of reliability and they do cater to different budgets with a wide range and different price points), and it's fair to assume sales into Sudan are going to be minimal-to-zero until that situation stabilizes, which may well take some years.
- Lack of Guidance: On October 27th, two days after the Sudan Military Coup on October 25th, Codan held their AGM and they once again declined to provide any revenue or profit guidance, same as in August when they also declined to provide FY22 guidance at the time they released their FY21 results. They also didn't provide any positive Trading Updates until the one they released on 25-Jan-2022 which caused the share price to rise +16.85% on the day (closing at $9.78, being $1.41 higher than the previous day's closing price of $8.37). They promptly dropped -10.22% (-$1 to $8.78) the following day, and they've now drifted down to $7.07, having been as low as $6.83 in intraday trading yesterday (12-Apr-2022). I'll reproduce that trading update below the graph because it's pretty upbeat and was largely ignored by the market, except for a short-lived spike up on the day, which can be seen on the graph below in the latter half of January.
Click on it to make it larger and easier to read. And then they reported their first half results for FY22 on 17th Feb:
You can access the entire document here - but the next page is also worth including here:
Now Alf Ianniello is probably regarded by the market as an unknown quantity because he has just come from 17 years managing Detmold Group which is a privately owned Adelaide-based global packaging company, however the main things to note are (1) that he is a good manager - I know people who work at Detmold and one of my bosses at my current day job (afternoon and evening job actually, where I operate a hommus and dip filler) has just left to go and perform a similar role at Detmold, and another guy I work with has also been offered a job there I'm told and is probably going to make the move also, and (2) he is not a guy who makes changes to stamp his authority, or for other stupid reasons; he is very much an "if it ain't broke, don't try to fix it" sort of bloke. You can see from his comments reproduced above that he understands and values the excellent company culture that Donald McGurk has created and nurtured at Codan, and that he is going to continue to execute on the vision that Codan already has there for the future. He sees the business delivering sustainable growth over the next 3 years. I believe he is going to continue to underpromise and overdeliver just as his predecessor did before him.
Disclosure: Codan is a core position in two of my real-life portfolios and is also one of my larger positions here at Strawman.com.
If we look at it all rationally, Afghanistan and Sudan are out of Codan's control however they both represent just a small portion of their prior-year revenue, the CEO/MD transition was done with plenty of notice and the new guy is a good manager, albeit largely unknown by analysts that specialise in listed companies, remember that Donald McGurk retired; he didn't leave to go run another company, and finally... their decision to NOT give FY22 full year guidance is not unusual, although clearly also not appreciated by the market. I don't have a problem with it, as long as they continue to deliver record results year after year. I haven't even mentioned the global pandemic or supply chain issues because Codan have navigated both of those issues beautifully, particularly the supply chain issues by building up their inventory levels significantly last year. They really haven't put a foot wrong. The market sees better or more exciting opportunities elsewhere. That's fine. That's what the market does. Codan is a high quality company that is going to keep kicking goals for many more years to come and I'm going to be cheering them on as a happy shareholder. Even if the gold price drops like a stone. Although I don't think that's very likely any time soon.
Source: ASX website: https://www2.asx.com.au/markets/company/cda
Personally I don't follow Codan, so my comment should be kept in perspective.
There has been such interesting commentary on the thread that I decided to read some of the companies reoorts late last night. I noticed the 'comforting' statement in the CEO address, in its latest announcement:
"Some 18 months ago, the business made a conscious effort to increase Minelab inventory levels, in order to mitigate supply chain risk and minimise escalating freight costs. As a result, Minelab inventory increased $15 million during the year, which is serving us well given the current shortage of key electronic components. I would like to reassure you that we are well positioned for the balance of the financial year and we continue to actively manage our supply chain risk through sourcing alternate parts and carrying additional holdings of key components. "
Being a Holder in Audinate my initial thought was the "balance of the financial year" is still a long way short of the timeframe for the forecast shortage of certain electronic componentry that AD8 will endure. Maybe my thought process here is wrong, because the electronic componentry used by CDA may be entirely different to that used by AD8.
I would be interested to buy CDA at some point into the future, but I certainly would want to see a turnaround on the chart first.
Just my 2 bobs worth.
Thanks for the 2 bobs worth @ShangriLa, good points. Regarding the current and prolonged chip shortage issues, I think Codan are in a very similar position to what Spectur are in, in that they engineer and design all of their own stuff in-house and can modify componentry to suit availability of parts. The fact that they have enough stock to last them through until at least July 2022 is a big plus also. That gives them plenty of time to engineer alternative solutions for components that are likely to still be in short supply at that point. Audinate can do the same, in terms of modifications, but I sensed that they were caught on the hop with very little stock to tide them over in the meantime. Codan, by comparison, are in a far better position due to their huge inventory build-up.
Here's their HQ, not too far from where I live in the North Eastern suburbs of Adelaide - I pass within a couple of blocks of their HQ every day on my way to and from work.
