Codan Limited (CDA) released a considerably strong result in their Half Year Report FY20. On the 3rd of March CDA released a comprehensive investor presentation. Could Codan present a potential upside over the long run or a potential bull trap?
About Codan (CDA:ASX)
Codan Limited are based in Mawson Lakes, South Australia. They design and manufacture a range of electronic products and associated software to governments, businesses, aid and humanitarian and also to the general consumer. Codan is well known for their metal detector brand – Minelab. I have had the opportunity in previous years to have used these metal detectors, from the base models designed for service location (sewer manholes) all the way up to their top hobbyist metal detector – CTX-3030.
Key Fundamental Drivers
Existing Products are performing well.
Metal Detection accounted for a total of $100 million in the Half Year and communications accounted for $67 million. With other minor sales this brought the total sales for the first half FY20 to $171.0m. The largest result ever for the company. Metal detection saw a 22% growth in sales and a 33% increase in segment profit in the first half. Similarly, communications saw sales up 65% with profit up 62% over prior 1st half. Sales are continuing to increase year-over year for Codan which puts it in a great financial position, which brings us to point 2.
Codan boasts one of the most impressive balance sheets on the ASX. It has a massive $51.0 million in cash and more importantly, no debt. Possibly even more impressively, the cash reserves have increased from $37.5m the year before and from $13.0m the year before that. Essentially, Codan is able to maintain product dominance in their field and make money while doing so. Codan have also been able to increase EBITDA margin from 29% to 30% and now 32% over the span of 3 years, representing the scale of economies, meaning, they are able to manufacture more products without incurring larger costs also while increasing margins. These are a few signs of a healthy business.
Codan have stated that they have received “strong backorders for Vanquish” their latest mid-ranged Metal Detector which is expected to be delivered in H2. Codan are also expecting to release 5 key products during FY21 which should accelerate growth and margins alike. Furthering their dominance in the metal detecting and defence/first responder communication sector.
While Codan don’t seem to have a problem with production of their metal detectors and communication products, a majority of their sales rely on the higher end metal detectors and defence contracts. Namely, their gold detectors. While gold price continues to climb in the short term, this will increase demand and desire for the product. However, if, for some reason, gold price were to tank, I would hazard a guess that sales for their more expensive gold detectors could plummet with the spot gold price. Codan have also noted a communications contract that has since completed which represented $21m which is not to be expected to be repeated in H2.
I won’t pretend that I am the best person who charts. I know I am not. From what I can see, Codan could continue upwards and test a breakout point towards the $6.95 mark. If it does manage to break the line it could possibly continue it’s march back towards the $8 mark. The MACD trend line also supports a weak bullish signal trending upwards.
The information in this article is for general purposes only and should not be considered as advice to any persons. No monies should be invested based on what is contained in this article.