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."