Heightened Defense Spending And Resilient Communications Will Create New Markets

Key Takeaways

• Rising defense and resource security demand, alongside strategic acquisitions, is expanding Codan's market presence and driving top-line and margin growth.
  
• Ongoing R&D and integrated product development enhance recurring revenues, operating leverage, and position Codan for sustained long-term earnings improvement.
  
• Heavy reliance on volatile gold detection and competitive communications markets, with rising costs and regulatory risks, threatens earnings stability and future margin growth.

Catalysts

Develops technology solutions for United Nations organizations, security and military agencies, government departments, corporates, individuals consumers, and small-scale miners.

• Heightened geopolitical tensions, increased defense spending, and the need for resilient communications infrastructure-especially in light of remilitarization and growing demand for unmanned systems-are expanding Codan's customer base and forward order book in defense and public safety, driving both near-term and long-term revenue growth.
  
• The integration of Kagwerks and DTC, development of interoperable MESH radio platforms, and the shift toward full-solution communications providers position Codan to capture higher-margin contracts, improve operating leverage, and expand its reach in large, high-growth markets (e.g., U.S., Europe), supporting margin expansion and earnings growth.
  
• Sustained global demand for resource security, high gold prices, and robust growth in emerging markets such as Africa continue to underpin strong demand for Minelab's metal detection products, particularly gold detectors, supporting high segment margins and top-line growth.
  
• Ongoing investment in R&D-including AI, new product launches like the Gold Monster 2000, and integrated, software-driven platforms-enables Codan to stay ahead of industry trends, lengthen product cycles, and generate higher, recurring service revenues, underpinning improved revenue quality and long-term net margin improvement.
  
• Codan's disciplined M&A strategy, strong balance sheet, and expanded credit facility provide financial flexibility to pursue strategic acquisitions that add complementary technologies, broaden end markets, and drive both revenue synergies and cost efficiencies, supporting sustained earnings growth and higher long-term returns.

Codan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Codan's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.3% today to 19.3% in 3 years time.
• Analysts expect earnings to reach A$185.4 million (and earnings per share of A$1.02) by about August 2028, up from A$103.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.3x on those 2028 earnings, down from 52.5x today. This future PE is greater than the current PE for the AU Electronic industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Codan Future Earnings Per Share Growth

Risks

• Codan remains highly reliant on the cyclical gold detection market through Minelab, which is vulnerable to long-term secular decline as easily accessible gold deposits diminish and regulatory or social pressures increase-the risk of lower future revenues and heightened earnings volatility is notable.
  
• Intensifying competition, particularly from large, well-capitalized players like Motorola (following its acquisition of Silvers in the MESH radio space), could accelerate commoditization and erode Codan's differentiation in communications solutions, putting downward pressure on margins and net profits.
  
• Growth in Codan's U.S. and European communications businesses is increasingly exposed to government procurement cycles, funding uncertainties, and regulatory shifts-creating risks of delayed or lumpy revenues, especially given extended sales cycles and sensitivity to changes in defense or public sector budgets.
  
• Persistent increases in capitalized product development and integration costs (due to ongoing engineering and acquisition activities) suggest rising amortization expenses, which could negatively impact earnings growth and net margins if new products or acquisitions do not perform as expected.
  
• Codan's expansion into high-growth, complex sectors like unmanned systems and soldier-worn technologies increases dependence on rapidly evolving technology and regulatory environments, potentially exposing the company to obsolescence risk or higher compliance costs, which could squeeze both future revenues and net profit margins.

Valuation

• The analysts have a consensus price target of A$27.18 for Codan based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$30.05, and the most bearish reporting a price target of just A$21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$961.4 million, earnings will come to A$185.4 million, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$29.95, the analyst price target of A$27.18 is 10.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.