Micro Cap Opportunity: Combination of Deep value, Quality and Mean Reversion

Codan Ltd on OTCBB (CODAF) or Codan Ltd/Australia (CDA:AU)

is financially strong, consistent earnings grower, diversified leader in several cyclical and non cyclical niche markets paying a consistent dividend down 77% for the past year. 

Luck or in this case bad luck (over reaction) is mean reverting. Multiple years of high ROIC reported in excess of 15% is not luck. Hence it logical to expect Codan will reverse the negative 77% 52 week change. Intrinsic value did not dramatically change over several months for this successful company founded in 1954. 

Rare combination of deep value, quality and mean reversion opportunity. 

Codan Limited (CODAF): CDA :(AU)  founded in 1954 designs, manufactures, and markets communications equipment, metal detection products, and mining technologies. Their core products are radio communications and metal detectors/mining technology. Also they provide multilayer printed circuit boards through IMP Electronics Solutions subsidiary. Codan markets include government, business, humanitarian, security, military and consumers in more than 150 countries. 

Codan has manufacturing and corporate offices in Australia with representation in the United States, England, Germany, India, and China. Additionally a manufacturing facility and representative office is located in Ireland.

So how does Codan (CODAF) (CDA.AU) offers a unique combination of value, quality and mean reversion opportunities. 

Market Cap = 121.20M Enterprise value = 184.08M
Current price = .68 USD or 0.7050 AUD 

52-Week Range in AUD = 0.5925 - 3.1600   

06/10/14 1 Australian Dollar equals 0.94 US Dollar    

Trailing P/E (ttm): 5.52 , Price/Sales (ttm):0.08, 
Enterprise Value/Revenue(ttm): 1.18 
Enterprise Value/EBITDA (ttm):5.08
Profit Margin (ttm): 14.22% ,Operating Margin (ttm): 18.74%
Return on Assets (ttm): 9.10% ,Return on Equity (ttm): 20.43%
Revenue (ttm):155.63M , Revenue Per Share (ttm): 0.88
EBITDA (ttm): 36.24M ,Net Income Avl to Common (ttm): 22.32M
Total Cash (mrq): 6.04M , Total Cash Per Share (mrq):0.03
Current Ratio (mrq):3.37
Book Value Per Share (mrq):  0.63
52-Week Change:   -77.90%
52-Week High (Jun 13, 2013):  3.10

Shares Outstanding: 176.94M ,Float: 82.02M

Dividend Indicated Gross Yield  17.22%

Cash Dividend (AUD) 0.0150 ,Dividend Ex-Date 03/07/2014

5 Year Div Growth 5.51% ,Next Earnings Announcement 08/22/20

Exceptional historical growth in BV,revenue,and EBITDA (see table below for 12 month, 5 year and 10 year periods).

Annualized Growth Rate

Mean reversion candidate with an unjustified 1-Yr negative stock price change of -76.00% 

High quality indicated by a Piotroski F-Score score of 7 (0 to 9).

Pitroski F- Score is calculated by reviewing and identifying positive or negative CHANGES in ROA, cash flow return on assets, net assets, quality of earnings by reviewing accruals, leverage and working capital, share count, gross margin and asset turnover. 

Quality metrics, Gross Margins and exceptional ROIC

Revenue annual growth % for the periods 5,10 Year and 12 months 11.00%, 6.30% and -24.60% respectively 

EBITDA annual growth % for the periods 5,10 Year and 12 months 13.20%, 29.40% and -51.30% respectively 

Book Value annual growth % for the periods 5,10 Year and 12 months 4.90%, 17.60% and 4.60% respectively 

Deep Discount to intrinsic value based on dividend yield, growing book value supported by years of positive free cash flow.  

A review of half-year results reported February 2014 for the period ended December 2013 provides valuable insight. Less than expected YOY results contributed to a dramatically lower stock price, -77% 52 week change. But management continue to see long-term growth opportunities in all three segments. Furthermore, management was proactive to the lower sales performance.The expense base was reduced by 10M per annum. Yet, despite this restructure, Codan will  maintain investment levels in new product development. This will ensure new product platforms are market available as needed.

Managment's Outlook

"Although sales have been softer during the past nine months, our baseline metal detection business remains strong, and we remain confident of future growth as we continue to develop new market-leading products and extend our global reach, all supplemented by the upside of future gold rushes. 

Radio Communications continues to broaden its business by leveraging off the new
Envoy product platform, expanding into new growth markets and offering an integrated solution incorporating our land mobile radio capability. Although history shows our sales can sometimes be volatile due to the nature of our gold detector markets, where gold discoveries can occur at any time and anywhere, we have a solid baseline business from which to grow and are supplementing this with heavy investment in new product development and entry into adjacent markets." 



ShadowStock said...

I responded to a question on the intangible asset balance as follows.

Those intangibles have generated large amounts FCF. Cash allocated to dividends, R&D and expansion.
I went back ten years, June 2004. Consistent (never missed) quarterly cash dividend totaled .77AUD.

Cash dividend for the last 4 quarters totaled .225, the 4 quarter before that .17. The current price is .70AUD. Even using a simple dividend discount model the stock trades below intrinsic value.

Financially sound with strong Z and F scores. In addition, intellectual property, global distribution, partnerships, will all add to its terminal value.

Ten years ago the stock price was 1.80 with a book value of .38 per share. Today the AUD price is .70 with book value of .68.

Current P/S is .75, historical low; P/S 2013 = 1.14, 2010 = 1.28
Codan reports its highest profit of $45.4 million in 2013, taken from corporate site. http://www.codan.com.au

ShadowStock said...

The "dividend indicated gross yield 17.10%" was taken directly from Bloomberg

Morningstar has the current yield listed at 11.55% and projected 11.39%
5 Year Dividend Growth 5.51%
Recent Dividends
Date Type Amount
03/07/2014 Cash Dividends 0.0150
09/09/2013 Cash Dividends 0.0700
03/08/2013 Cash Dividends 0.0600
all in USD per Morningstar

ShadowStock said...
This comment has been removed by the author.
ShadowStock said...

Response to a question was as follow;

Management spoke about counterfeit products sold in Africa. In addition they mentioned political instability in Western Africa and the strong second hand market in those areas.
However they claim to be better positioned than anyone else to take advantage of gold rushes as they occur. New platforms are planned to be released this year including a Low Cost Metal Detector.

Quote from management “Work on the next generation of gold and mine detecting technologies is also well underway. In addition, a new mid-priced, compact and fully waterproof gold detector will be released in April 2014.
The consumer market for metal detectors continues to be strong and relatively
predictable, and has grown significantly in recent years. The release of our F3
compact mine detector has been very well received and we continue to see new
opportunities for our mine detecting technology across a number of markets. Our
consumer and mine detection products provide a solid foundation for the Minelab
business and, with our ongoing investment in new technology and market
development, we expect this to continue.”

“Momentum continues to build in our Radio Communications business and we enter the second half of FY14 with our strongest order book for a number of years.”

Most of my ideas don’t rely on forecasting. Instead rely more on existing assets both tangible and intangible. There are no bad assets just bad price

Cameron said...

I think the lack of demand for their metal detecting equipment is due to the fall in gold price. See here:


I have no idea what the intrinsic value of gold is, but I will look into it if the price of gold goes back up.

ShadowStock said...

Cameron, thanks for the link.

The price of Gold coupled with counterfeits, second hand market. They still earned a profit in the most recent quarter.


ShadowStock said...

Cameron, thanks for the link.

The price of Gold coupled with counterfeits, second hand market. They still earned a profit in the most recent quarter.


ShadowStock said...

Cameron, thanks for the link.

The price of Gold coupled with counterfeits, second hand market. They still earned a profit in the most recent quarter.


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