24 Jun 2020


Codan goes from strength to strength

If you’re a regular reader, you probably know that one of my favourite Australian companies is Codan Limited (ASX: CDA), which makes communications, metal detection, and mining technology. Its share price has doubled in the past year, and its latest trading update gives me more reasons to be pleased we hold it in our funds.

A bit of recent history. On 23 April, Codan issued a trading update where they warned that their manufacturing partners located in Malaysia were impacted by lockdown measures by the Malaysian government and as a result, they were seeing sales drop by approximately 20 per cent in May compared to the run rate in the previous months. As a result, the share price fell quite substantially to $5.52.

On 17 June, Codan released another trading update where they spoke about very strong demand in both their metal detection and communication divisions and upgraded full year guidance to a net profit after tax (NPAT) of around $63 million compared to the consensus which had settled around $56 million, or a 12.5 per cent upgrade. As a result, the share price has reacted very positively and is now trading at $7.70 or around 40 per cent above the April 23 level.

Having talked to the management of Codan, there are four drivers of this very strong performance:

  • The new coin and treasure metal detector aimed at the mass market called Vanquish, launched just before Christmas, has been a big success and has so far sold about 50 per cent more than originally expected. It seems like a lot of people have taken up metal detection as a hobby during lockdown which is understandable as it is by nature a solitary activity not impacted by social distancing rules. Codan is also clearly taking market share in this area which we can see from one of the competitors (White’s) announcing last week that they are shutting down operations.
  • The demand for gold metal detectors has continued to be very strong, especially out of Africa. Even though we are seeing more COVID-19 cases in African countries, we should remember that many African countries are quite used to various disease outbreaks and are taking a less restrictive approach than most western countries and again, gold detecting does not involve close interaction with other people.
  • The manufacturing issues were solved shortly after the 23 April update as the Malaysian government eased restrictions in early-May so Codan manufacturing partners could ramp up production again and satisfy the strong demand.
  • The Communication division saw a good rebound in demand, both in the Tactical Communication area where they closed a significant deal selling radios to the Afghanistan government and also in the Land Mobile Radio area where US government stimulus packages resulted in quite a few local municipalities speeding up their purchase of new equipment.

It is evident that Codan is experiencing strong current trading conditions and they have been minimally impacted by the various lockdown measures around the world. When we look into next year, there are some positive factors that points to them being able to continue to grow profits but also some potential clouds:

  • In the metal detection area, we should have a full year effect from the Vanquish sales.
  • They will in September launch a new gold detector called GPX 6000 which will slot in just below the current top model GPZ 7000 and sell for around $8,000. The capabilities of this detector are slightly different from the top model and hence there should not be too much cannibalisation between the models.
  • The Land Mobile Radio division should continue to grow strongly on the back of new product launches which will enable Codan to sell a higher percentage of system solutions rather than pure hardware sales.
  • The underground tracking business has been de-risked as Caterpillar has agreed to pay for Codan’s research and development team to the tune of around $6 million per year and it sounds like Caterpillar is finally ready to really start to market their Minestar product which Codan contributes the majority of the IP for.
  • The potential downside compared to this year could come from the Tactical Communication division where it is possible that governments around the world might decide that they need to stimulate their economies rather than purchase new equipment for their militaries.

Overall, we continue to think that the future looks bright and that Codan is a very well-managed company that we are happy to hold in the portfolio.

To read earlier blogs on Codan, see articles:
Why we continue to like Codan
Minetech could be a game changer for Codan
Video: Interview with CEO of Codan

The Montgomery Fund and Montgomery [Private] Fund owns shares in Codan. This article was prepared 24 June with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Codan you should seek financial advice.


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