Codan Limited (‘Codan‘ or the ‘Company’, ASX: CDA) is a global manufacturer of radio communication products, metal detection products and tracking solutions, with facilities in Australia, USA and Canada. Customers include security and military groups, government departments, small scale miners, and individuals The Company was founded in 1959 and listed on the ASX in 2003. Its products are sold in 150 countries.
Communications segment to drive revenue growth
Following a robust FY24 financial performance when revenue increased by 21 percent to $550 million and net profit after tax by 24 percent to $81 million, Codan is investing in Communications to drive growth in future markets.
In recent years more than $200 million has been invested in specialist Communications acquisitions in North America and the UK. Businesses acquired include communications service providers covering emergency services, mission critical public safety and control room markets, Homeland Security and military-grade systems, wireless video camera links and high-quality video broadcast products.
In FY24, Codan derived 59 percent of earnings from Communications and 41 percent of earnings from Metal Detection technology. Communications segment share of earnings is likely to rise sharply in the medium-term given that 74 percent of total engineering investment is directed towards Communications, in line with the Company’s future growth strategy. The remaining 26 percent of engineering and research expenditure is directed towards the Metal Detection segment. The amount allocated to engineering investment in support of a pipeline of projects under development is 10 percent of annual revenue, which was $55 million in FY24. Development funds are allocated to a team of highly skilled engineers and research scientists to drive product innovation and customer roadmaps.
Future focus on US Department of Defence
Global defence and anti-terrorism expenditure is rising in response to heightened geopolitical tensions, de-globalisation, and onshoring of defence production and supply chains. This is evidenced by the Five Eyes strategic intelligence alliance comprising Australia, Canada, the United Kingdom, New Zealand and US. These partner countries share a range of intelligence and collaborate on public safety and national security issues facing each of the Five Eyes partners.
Within this alliance are high quality customers in large, global addressable markets. Codan, through its recently completed acquisition of Kagwerks, now owns a portfolio of proprietary products that enable secure and integrated communication in military environments that provide a strategic advantage in the field.
This advanced military-grade technology positions Codan as a full tactical military radio solutions provider to Prime Contractors under the US Defence Logistics Agency Tailored Logistics Support Program. Codan management have expressed confidence this relationship with the US Department of Defence will achieve future revenue growth based on the proven performance of the technology and by leveraging the Company’s existing global network in other Five Eyes and NATO countries.
Growth prospects
Management expressed considerable optimism about the Company’s FY25 growth prospects at the October AGM with organic revenue growth of 10 to 15 percent in the Communications segment and high single-digit revenue growth in the Metal Detections division.
The integration of the Kagwerks acquisition will further enhance Codan’s technological capabilities and enable Cogan to compete effectively in the global military communications market.
The Company’s impressive record of product innovation and with $200 million in bank facilities and a low leverage ratio of one times EBITDA, Codan is well positioned to pursue bolt-on acquisitions. Debt is a cheaper cost of capital than equity and so acquisitions that enhance the quality of Codan’s Communications segment revenue are likely to be well received by the market.
Seventy percent of revenue is sourced from North America and Europe, with about 8 percent from Australia, and so the weaker Australian dollar in recent months should have an overall favourable impact on FY25 earnings. A strong Communications forward order book, new product releases in the Metal Detection segment and Codan’s 50 percent dividend payout ratio of fully franked dividends should support earnings growth in the period ahead.
