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Going for gold: are metal detectors the key to striking it rich?

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Key statistics: ASX: CDA

Closing share price 18.10.17: $2.445

52-week high: $2.528

codan asx shares share market stocks stock market chris batchelor cda invest gold precious metals metal detector

52-week low: $1.277

Most recent dividend: 7c

Annual dividend yield: 2.86%

Franking: 100%

Nothing gets the heart pumping like the prospect of striking gold. Whilst small time prospectors are now a fairly niche group in Australia, in Africa there is still a lot of prospectors hoping to strike it rich.

South Australia based Codan (ASX:CDA) produces metal detectors including the GPZ 7000 which is considered to be the best gold detector in the world.

Codan, founded in 1959, has been around for a long time.

In addition to metal detectors, it also makes specialised communications equipment as well as mine safety products.

The past decade has been a real rollercoaster ride for investors in Codan.

The business is highly cyclical with its fortunes tied to the resources sector. Revenues, profits, and indeed the share price peaked in 2013 and have yet to return to those levels, although in 2017 revenues and profits came very close.

The share price is still about 35% below its peak.

So the key question is: are revenues hitting another peak and likely to decline from here or are they on a more solid footing than they were in 2013? The most volatile aspect of Codan's business is the sale of metal detectors, and in particular, sales in Africa.

In 2013 metal detectors accounted for 68% of sales. This has only declined marginally in 2017 to 66% however communications have increased in the product mix from 24% to 31%.

Other products have also declined.

The good news is communication equipment provides diversification away from resources as the main customers are military and NGOs.

Further growth in communications is expected in 2018 due to investment in new products, additional engineering and sales staff.

Management believes sales into Africa of metal detectors may have peaked and are therefore expecting modest declines in revenue. They could of course be surprised on the upside.

Analysts are forecasting revenue to decline from $226 million in 2017 to $204 million in 2018 with a corresponding fall in profits from $44 million to $33 million.

Assuming profits do fall as expected, Codan is trading on a forward PE ratio of 13. Based on 2017 profits the PE ratio is less than 10.

These are quite low multiples and reflect the uncertainty of forecasts and the cyclical nature of the business. If Codan is able to maintain the current levels of profitability then it represents fairly good value.

Other positives include a strong balance sheet and cash flow.

Over the past three years debt has been paid down from $60 million to zero and there is now $20 million in cash on the books. Cash flow is strong with cash generation far exceeding requirements over the past three years.

Since January 2016 Codan has increased in price by 4.5 times.

It may be at a cyclical high in terms of the metal detector revenue, however even with a significant reduction factored in it is still trading at a relatively low PE multiple. In addition, the business looks a lot more robust than it did in 2013.

The author's related parties have holdings in CDA.

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