How two years of COVID-19 have affected Codan shares

In March 2020, when the COVID crash was in full flight, I commenced my article with, "'Be fearful when others are greedy and greedy when others are fearful.' So says investing legend Warren Buffett."

And then posed the question "So is now the time to be greedy (and brave) and if so, how should you go about it?"

The article went on to describe Codan (ASX: CDA) and talk about how it was a solid business caught up in the overall market panic. At the time of writing the share price was $4.87. It fell to a low of $3.90 but then began a remarkable rebound topping out at $19.36 in June 2021.

Those who had the courage to buy when the market was in the depths of despair, and then the foresight to sell somewhere near the top could have quadrupled their money.

Codan derives its revenue from metal detectors and communications equipment. The biggest market for metal detectors is prospectors in Africa but they are also sold for recreational and professional purposes throughout the world.

Communications consists of high-tech radio equipment. These products are sold through large contracts mainly to government agencies and military customers. In 2021 Codan made two large acquisitions in the communications space. Domo Tactical Communications for $US88 million and Zetron for $US45 million. This has increased the contribution to revenue from the communications segment from about 30% to 46%.

The tracking solutions business, Minetec was also divested in 2021. This business had never managed to gain much traction.

These structural changes to the business place it in a good position moving forward. Whereas the revenue from metal detectors can be quite volatile and is based on many small sales, the revenue from communications comes from large contracts with blue-chip customers.

The geographic breakdown of sales has also shifted. Previously sales were about 50:50 between the developing world and developed world, whereas now developed world sales have increased to about 67%.

The other big change in 2021 was the retirement of long-term CEO Donald McGurk. McGurk was highly regarded and had built the business into a very successful operation.

The new CEO Alf Ianniello has big shoes to fill, but he appears to have a solid resume with both technical and leadership experience.

The financial performance of Codan in recent years is difficult to fault. Revenue has grown at a compound annual growth rate of 24%p.a. over the last three years, and earnings per share (EPS) by 33%p.a. over the same period.

Analysts are forecasting that these growth rates will taper off, especially for EPS, however they remain solid at 5%. Codan has also had a habit of surprising on the upside. EPS grew by 22% at the half-year, so those forecasts are implying no growth in the second half which may be overly pessimistic.

It will not be immune to the supply chain and logistics challenges that companies across the world are facing. However it has put in place strategies to mitigate the risks including building up inventory.

Having reached highs above $19 in June last year, the share price has since tumbled by 62%. EPS forecasts have fallen by 12% over the same period.

Clearly the bulk of the fall has been due to euphoria turning to concern and approaching despair. The question is does this represent another opportunity to buy a quality business at a bargain price.

The bargain is not as great as it was two years ago, but nor is the magnitude of the uncertainty. At a forward PE ratio of 13, it is now trading below its average PE ratio of the last five years. The dividend yield is also about 4% fully franked.

There have been some significant shifts in the business over the past year, but those willing to dig beneath the surface may find some shiny coins waiting to be picked up.

Disclaimer: The author's related parties have holdings in CDA

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