FWIW (not much, based on past history of public statements on stocks he holds or wants to own, imo)
The share price of electronic solutions and metal detector maker, Codan (ASX: CDA), has fallen around 42 per cent since June. It’s now back where it was around 12 months ago. But instead of being concerned, I believe the company continues to have a very bright future. Long term readers will know...
The share price of electronic solutions and metal detector maker, Codan (ASX: CDA), has fallen around 42 per cent since June. It’s now back where it was around 12 months ago. But instead of being concerned, I believe the company continues to have a very bright future.
Long term readers will know that Codan is one of my favourite companies and it has been a significant contributor to fund performance over the past four years. After peaking at just over $19/share in June, the share price has come off and is now trading at just over $10/share as we can see in this chart which shows Codan’s share price during the last five years.
So what has happened to cause such a fall?
There are a couple of reasons for the weakness in share price.
The first is related to the full year results in August. The well-regarded long-term CEO Donald McGurk announced his intention to retire. Donald has been with Codan since 2000 and has been the CEO for the last 11 years and has built up a lot of trust with the market. This announcement came after the company executed two acquisitions and caused the market to increase the risk premium it applied to Codan’s shares which caused the first leg down to around $14/share.
The second and most recent fall to approximately $10 came post the recent AGM announcement where the company said that the existing businesses were trading in-line with last year. This is consistent with what management indicated at the time of the full year results and should not come as a surprise given that FY21 was an extremely strong year in particularly for the metal detection division as a lot of people took it up as a new “naturally social distanced” hobby during lockdowns. Management was very clear that a flat outcome year-on-year would be very good, but it seems like some analysts and investors have been so accustomed to the management team’s history of under-promising and over-delivering that they assumed that this was the case again and built in growth assumptions in their forecasts. When Codan came out and said that the existing business is flat, there were therefore some disappointment in the market and it seems like the market is now assuming that the existing business is ex-growth.
The recent acquisitions have yet to present any hard numbers on how they are tracking and the market can therefore not yet form a firm opinion on if they will add value over time.
So what do we think?
Regarding Donald’s departure, we are of course sad to see him go as he has been a very good CEO who has made a number of good decisions. We are very impressed with the rest of the management team and do not think that a new CEO will result in any big changes to strategy or operational execution. We would probably have preferred to see an internal candidate but understand the company’s reasoning for looking for an external CEO. They are looking for a 10-year CEO and the obvious internal candidates are of an age where such a commitment cannot be made. Given Codan’s market position and growth trajectory, they should be able to attract highly qualified CEO candidates so we are confident that they will be able to replace Donald.
Regarding the existing business being ex-growth, this seems like a very pessimistic assumption to us for a number of reasons:
It is most likely true that the metal detection business received a one-off boost due to lockdowns and stimulus payments being spent on a new hobby but we believe that the market will continue to grow as there are many parts of the world where metal detection for either gold or recreation is virtually unheard of and Codan is actively looking to develop these markets by opening up sales offices or appointing sales agents (Brazil, India, Indonesia and several African countries).
Even if there was a one-off boost in recreational sales, it was likely in the lower priced machines. Users which “get the bug” will likely upgrade to more advanced higher priced machines in time and the increased “installed base” from last year’s one-off boost will therefore have positive longer-term effects.
Codan estimates that they are spending more on R&D in metal detection than all its competitors combined. This should over time lead to further market share gains and according to Codan, they have about 27-28 per cent market share in both US and Europe so there is plenty of potential growth from market share gains if they continue to out-innovate the rest of the industry.
The existing Communication division will suffer a bit in FY22 from the withdrawal of US troops from Afghanistan as they will have to replace around $8 million of sales now that the Taliban’s are in charge there. The resumption of international travel should though result in Codan being able to engage with new and existing customers again so they should be able to replace this over time.
In addition to how we see the existing business, the recent acquisitions both seem quite exciting to us. Zetron will likely be a major beneficiary when the U.S. updates its emergency number system (search for NG911 if you want to read more) and Codan announced on the same day as the AGM that DTC has won a major order from a large multinational technology company to supply mesh radio equipment for a product that will be sold to the US military over the coming 10 years.
Overall, the fall in share price and some limited downgrades has resulted in the valuation contracting significantly in the last few months as we can see from the following chart which shows the one year forward looking P/E ratio (the yellow line) contracting from a top of close to 30x to around 16x currently. The directors of the company seem to think the price fall is overdone as they have been busy topping up their shareholdings after the AGM and we tend to agree with them.