Upgrade cycle continues for Codan

Naheed Rahman

Technology company Codan (CDA) has been in an upgrade cycle for the last two years. Last week it announced yet another upgrade to guidance, which was ahead of previous expectations as well as consensus. Even after a big price move, it trades on an undemanding multiple, and with multiple drivers we expect it to keep performing from here.

The business develops, manufactures and sells electronic solutions across three divisions:

  1. Metal Detection (under the brand Minelab)
  2. Tracking Solutions (under the brand Minetec)
  3. Radio Communications

Strong margins for metal detectors

The Metal Detection division in particular has been the driver of earnings upgrades over the last two years. Specifically, the launch of upgraded flagship product, the GPZ 7000, two years ago started the upgrade cycle. The product has been selling strongly into Africa, where it is used by artisanal miners to explore for gold, and was a vast improvement to the company’s previous world-leading model as it detects up to 40% deeper.

Selling at up to US$10,000 a unit with +80% gross margins, it’s not hard to imagine the substantial profitability generated given sales of several hundred units per month.

A further positive development has been the release of new complementary metal detection products to the artisanal mining market including the Gold Monster and the SDC 2300, thus diversifying the product mix and reducing the reliance on any one particular product. The company continues to enter new markets, and the ongoing R&D program to develop new products should ensure continued growth over time.

The other two engines firing up too

Pleasingly, the other divisions (Radio Communications, and Minetec which is used to track assets in underground mining sites) are firing as well.

In particular, Minetec delivered segment profitability in FY17 for the first time after being loss-making over the last several years during a period of heavy investment in the product and technology.

We expect strong profit contributions from this division over the medium term, supported by last week’s contract win announcement with BHP worth $9.5m to deliver a fleet management system with high-precision tracking at BHP’s Olympic Dam underground mine in South Australia.

However, the most pivotal development in the Minetec division was earlier this year with their global licensing, technology development and marketing agreement with Caterpillar, the world’s leading manufacturer of mining equipment. This distribution agreement should allow sales to scale up rapidly.

Ultimately we expect the Minelab division to be the greatest driver of growth for the overall group over the next few years.

More to come

We expect the stock to continue to perform, given CDA is trading at only 14x PE with multiple growth drivers and an excellent management team to drive the strategy. A $20m net cash position which is building quickly also provides good optionality for acquisitions, or further dividends.


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