Codan - CDA

[Lizard]

I've glanced at this company a few times over the years, but never got much closer. Thought it was time I made the most of the rainy day (and the fact that CDA was an early reporter this season) and gave it a new thread. There is a prior thread by the venerable yogi, but I'm sure he won't turn in his grave if I start one from a slightly less astrological viewpoint.

Codan was founded in 1959 and developed a diverse range of niche value-added products for communications and broadcasting. It listed on the ASX at $1.10 per share in 2003, with a market cap of $178m and revenues of $113m. Existing shareholders retained 83% of the shares, making this a very tightly held company. Initially, the company enjoyed strong results, with 2004 revenues rising to $132m and a 50% increase in NPAT to $16.7m. As a result, the share price peaked at $2, close on a year after the date of the prospectus.

As so often happens in the case of recent listings, the gloss immediately began to tarnish. Strengthening of the AUD led to falling revenues and a flat NPAT result in 2005. This was followed by a less than inspiring AGM commentary regarding tough environment, exchange rate challenges and costs of buying market share in new satellite communications and digital microwave radio products.... Announcements segued into a downgrade ditty that confessed to a 50% reduction in first half forecast and promptly took the share price back below issue.

With revenue back at $117m and FY NPAT at $8.5m, 2006 should have been the bottom. The 6cps dividend was maintained - even if it did have to come from borrowings. Generous as it was next to the 75-90cps that the shares had traded to, the share price was soon back at $1.50. 2007 started out well... the Chairman retired while he was ahead... and then the 2007 crisis waylaid them. High AUD and acquisition costs didn't help so revenues of $121m translated through declining margins to a $11.2m NPAT. However, strong cashflows allowed the repayment of debt and an increase to the dividend to 6.5cps. Yet the GFC pressures continued, taking the price below 50cps in late 2008.

With 90% of revenues coming from offshore, the company used hedging as a temporary solution, while developing an investment plan to move much of their manufacturing into offshore markets. In addition, the company chose to make a major acquisition in the form of Minelab - a metal detection equipment specialist (including land mine detection). Cost was $70m and fully debt-funded. These changes boosted 2009 revenue back to initial post-listing levels of $132m, with NPAT at $12.8m.

A boom in "artisanal mining" and "countermine" sales from Minelab, saw revenues surge to $189m in 2010, with underlying NPAT of $31m. The AGM speech was quick to point out that this was unlikely to continue. A creditable performance was still achieved in 2011, with revenue of $169m and NPAT of $23.4m, while the dividend was raised to a total of 9cps.

A small acquisition, Minetec, was made in early 2012, adding a range of mine safety-based communications equipment to the range. This was followed by the sale and write-down of the loss-making satellite communications business. The FY result has now been released, showing revenues from continuing operations of $179m and underlying NPAT of $27.9m. A half cent increase to the dividend brings total to 9.5cps (fully franked) for a yield of 6.3% on current share price of $1.50. Diluted PE is 9.0 and forecast is currently very positive for existing business.

In addition, CDA has just announced another mid-sized acquisition of Daniels Electronics Limited, a Canadian based supplier of land mobile radio communications solutions in North America. Cost of acquisition is $A24m plus up to $A1.9m earn-out and initial 2013 EBITDA contribution (10 months) expected to be $2m after costs. Interestingly, the company has used this opportunity to make a significant placement of 8.9m shares, along with an SPP to existing shareholders that could result in a further 3.6m shares being issued. This should be a strong positive for liquidity, as so few shares were sold to the market at time of listing (followed by one SPP in 2009). This should therefore add more than 60% to the current free float.

The placement to institutions was completed at $1.40, so this could be an opportunity to acquire shares as those are placed into the market (quoted from 15 August). Although CDA has been a bumpy ride for holders, they have demonstrated potential to grow over the long term and short term forecasts are positive, supported by a good dividend. Increased liquidity should make them more attractive and the opportunity exists to acquire over the next month or two (at around $1.40-$1.50?) as placement and spp shares are allocated. Goes ex-div (5.5cps) on 10 September. Current market cap $246m and is included in All Ords.

[Lizard]

Hi KW, Yes, have followed the Boat Fund from early days, but don't think we share any picks. Can't guess their mystery stock - the closest I've got on my list would be STS, BYL and NAM - and I doubt very much that it is any of those.

I must have a look at the FXL result - one I looked at in April 2011 at $2.07 and didn't see enough value, so it will be good to see what I missed.

[mark100]

I follow TBF too as I tend to follow similar stocks. Haven't been able to guess the latest pick so far

[Lizard]

The placement to institutions was completed at $1.40, so this could be an opportunity to acquire shares as those are placed into the market (quoted from 15 August). Although CDA has been a bumpy ride for holders, they have demonstrated potential to grow over the long term and short term forecasts are positive, supported by a good dividend. Increased liquidity should make them more attractive and the opportunity exists to acquire over the next month or two (at around $1.40-$1.50?) as placement and spp shares are allocated.

Was able to pick some up at $1.44. Has paid the 5.5cps div and now looks to be on the way up again at $1.59, but would be good to see it push on past here to new high for the year.

[macduffy]

Well done, Lizard!

CDA hit a new 52 week high of $1.63 today. I should have followed your lead on this one but I already have an over-diversified Aussi portfolio........

[steve fleming]

Was able to pick some up at $1.44. Has paid the 5.5cps div and now looks to be on the way up again at $1.59, but would be good to see it push on past here to new high for the year.

From Richard Hemming (under the radar report) :

Ausbil gives us the low down on the five big themes that are affecting investment markets at this point

THEME 1: THE HUNT FOR INCOME
Prunty: “Certainty of yield is important, and the market is willing to pay up for increasing certainty, which is a trend in both large and small caps.”
The proof is in the pudding, which in this case means Australian 10 year bonds, which are only paying a yield of 3 per cent. But the Ausbil small caps team sees a trend that favours small caps with growing dividends.

---------------

Almost all the small/mid caps that I am in that are paying decent dividends are being re-rated to multi-year highs.

As interest rates are only likely to trend lower, this 'hunt for income' is likely to continue.

[macduffy]

And things are expected to get even better!

Chairman's address from today's AGM:

http://www.asx.com.au/asxpdf/2012101...kqhfnmf885.pdf

[Lizard]

Wow, better than I'd expected. I was working on $34m NPAT for full year, so my valuation now moving to $2.31 and I think good chance of getting there before FY. Currently around $1.83.

Given the continued strength of our business, it’s likely that we will post a very strong net profit after tax result for the first half. The Board is of the view that net profit after tax should reach $25 million dollars for the first half, which will be more than double that of the first half last year and will be the highest half year profit number in the company’s history.

For the full year we remind ourselves that we are living in uncertain and cautious economic times which can continue to delay purchasing decisions. We also have competitors, including counterfeiters, whose actions could put pressure on revenue and margins. Although it is early in the year, based on current momentum and a detailed consideration of management’s full year forecast at this morning’s Board meeting, we would expect to substantially exceed the company’s previous record underlying profit of $31.1 million and expect it to be in the region of $40 million, which would represent an increase of more than 40% over the result achieved in 2012.

[soulman]

Wow, better than I'd expected. I was working on $34m NPAT for full year, so my valuation now moving to $2.31 and I think good chance of getting there before FY. Currently around $1.83.

Not sure how cyclical CDA business is but management is forecasting a NPAT $25 mil in the first half and a conservative full year of $40 mil. I am in, getting a few in the afternoon giving the low future PE ratio and decent div yield.

[Snow Leopard]

Wow, better than I'd expected. I was working on $34m NPAT for full year, so my valuation now moving to $2.31 and I think good chance of getting there before FY. Currently around $1.83.

I should have just put an order in when I read the above, but of course I didn't !

Anyways, I have made amends and have acquired some this morning
(? why does the price never drop to my asking price until after I have raised it ?)

For what it is worth, I value CDA at $2.25 now aiming for $2.33 by 30-Jun-2013

best wishes
Paper Tiger