Pinned straw:
Wow! Codan is up 16.6% today to $9.80. I must admit the market reaction has surprised me a little. When I looked at the results they appeared to be in line with analyst earnings forecasts (3 analysts, Simply Wall Street data) for FY24 of 43cps. Earnings for the half were 20.9cps, so it seems to be on track. Although Revenues look higher than FY25 consensus (Pro rata). Let’s look at the highlights from the Half Year Accounts.
• Group revenue of $265.9 million, up 26% versus prior corresponding period (“pcp”)
• Net profit after tax of $38.1 million, up 24% versus pcp
• Performance by Communications businesses in line with 10 to 15% revenue growth target range:
- Communications revenues of $153.6 million, up 12.5% versus pcp, segment profit $37.8 million, up 9% versus pcp
- Communications orderbook of $183 million, +12% versus 30 June 2023
• Metal detection revenues up 49% versus pcp, with all divisions contributing to this growth
• Net debt of $82.5 million at 31 December 2023, having funded $30.3 million for the Eagle and Wave Central acquisitions in the period
• Earnings per share of 20.9 cents, up 22% versus pcp
• Interim dividend of 10.5 cents, fully franked
Sourced from the Presentation
Perhaps all the excitement is over the strong communications order book of $183 million, and the Outlook statement (see below) where management expect to “continue targeting revenue growth in the 10 to 15% range. With the benefit of acquisitions made in FY24, Communications overall growth is expected to exceed the top end of the targeted range.”
…and the Outlook
“When considering the outlook for the balance of FY24:
• After normalising for the large Communications project delivered in FY23 (approximately $20 million), and excluding the benefit of acquisitions, the Company continues to target revenue growth in the 10 to 15% range. With the benefit of acquisitions made in FY24, Communications overall growth is expected to exceed the top end of the targeted range; and
• Minelab is targeting a second half result similar to the first half of FY24, with FY24 revenue growth of 20% versus FY23
The Company will continue to keep shareholders updated as H2 FY24 progresses.”
My View
I’m a big fan of Codan and I’m pleased to see the bounce in the share price today, but I’m still trying to get my head around such huge positivity. @Bear77 is a big fan of Codan too, and I’m keen to hear what he has say about the results.
I think shareholders might be looking back at historical PE ratios and thinking now the company is turning around its now worth a multiple of 23 x FY24 earnings? The last time Codan was trading at a PE of 23x was in 2021 before the Russian Wagner Group all but destroyed artisanal gold mining in Africa. The gold detector business has a higher return on equity than the communications business and we have seen ROE fall from 32% to 17% since 2021 as a result. If someone could get the gold plundering, murderous Russian paramilitary out of Africa then Codan would be back on ROE above 30%. Putin needs the gold to fund the Ukrainian war, so pulling out of Africa is highly unlikely, unless he ends up with some Novichock in his underpants! ( ‘Navalny’ free on SBS is a must watch! A great man murdered by Putin).
Codan is rebuilding and diversifying its business and I expect ROE to improve to low 21% over the next 3 years. I think the current PE multiple is looking a bit high.
Valuation
Once again I’ll use McNiven’s Formua to value Codan assuming ROE 21%, Equity $2.31 per share (1H24 balance sheet), reinvested earnings 50%, and a required return (RR) of 10%, I get a valuation of $8.60. There’s no doubt Codan is a high quality business, but it’s starting to look a bit pricey. It’s one of our largest holdings IRL (9%) and in my top three on SM (14.8%). However, I think it’s HOLD at these prices. I’m certainly not a seller.
Bear77
Yes @Rick - Still a big fan of Codan and still holding. Codan is the largest position in my Strawman.com virtual portfolio (a.k.a. "scorecard"), the largest position in my largest real money portfolio, and the second largest position in my SMSF (Audinate, AD8, is now the largest thanks to a +127.5% SP rise from my $9.00/share purchase price in that portfolio), so I think that may help explain just how much I like the company as an investment.
In terms of the positive market re-rate of CDA today, I'm guessing it's the realisation that the Metal Detection business is not actually in decline now - it just had a bad couple of years on the back of lower sales into Africa. Metal Detection (Minelab) was the main driver of the share price in that 2019 to mid-2021 period (see first chart below) - they got to $19.33/share on 14-June-2021. It took the market a while to realise that Comms was the new growth driver for Codan over the past couple of years, and Comms has done very well for them, and their strategic acquisitions haven't done them any harm in that regard either. But Comms wasn't very exciting compared to gold detectors, and the market had mostly moved on and was no longer interested in Codan.
Perhaps some of Codan's prior-year supporters decided to take a fresh look today and jump back on, seeing as Codan appear to be firing on ALL cylinders once again. They were overbought in 2021, and they were oversold in 2022, perhaps in 2024 they will be closer to "fair value"...?
So, between $9 and $19. How does $14 sound? (7 + 7) Splits the difference.
Couple more reports like this and we could see it. I think they're going to be priced for growth again from here until they give the market reason to change their minds again.
ARB is another that was priced for too much growth in 2021 (overbought) and then got oversold in 2022, but they started to head back up in 2023 and the market liked their H1 report in 2024.
There are some similarities between those two charts and also between those two companies, in terms of both CDA and ARB being high quality companies with excellent management who tend to underpromise and overdeliver as a general rule (except for when stuff blindsides them) and both have excellent industry position within their chosen industries, along with superb global distribution networks. Both got overbought in 2021, both had big share price "corrections" in 2022 which took them (IMO) into "oversold" territory, and both are in the "recovery" stage in terms of their graphs. Both also have similar Covid-19 "blips" in early 2020.
ARB has a m/cap of $3.2 billion, so is twice as large as Codan is at this point, but both companies are growing, and Codan is growing faster, so I don't know who will end up as the largest in 10 years' time. I hold ARB in all of those portfolios that I mentioned earlier (that I hold Codan in). Both are high quality larger companies (over $1 billion m/cap) that tend to make up the majority of my real money portfolios, which allows me to take more risk with a smaller part of those portfolios. I like topping up with these sort of high quality $1B+ companies when they've been smashed due to cyclical issues rather than structural ones. They always come back.
However, regarding Codan specifically; In summary, I reckon today's positive market reaction to their H1 report was all about Minelab (CDA's Metal Detection division) returning to growth. Those who had previously jumped ship may now be clambering back onboard.
Slideup
I agree it was a solid result but I am also scratching my head a little at the market reaction. Up 20% on the results seems a bit over the top. I am imagining that the market took this slide to mean West Africa is back. Not sure if that is really correct though. Also minelab benefited from good countermine sales into Ukraine that were one offs.
Still happy to hold but I think it is getting fully priced above $10. Doing some quick sums I have a full year EPS of 0.42c. Which puts CDA on a FY24 PE ratio of 24 at today's price.
I did catch the end of the earnings call yesterday and I thought Alf's closing words were interesting - he basically reiterated that if they can keep revenue growing at 10-15% yoy and extract efficiency gains/cost controls of 1% a year then they will get their margin expansion and continue to do well.
@Rick I am curious if you use the McNivian formulae to inform sell decisions, and do you have rule of thumbs to sell when it is XX% above your estimate of intrinsic value or do you just play it on a stock by stock basis on quality estimates?