Minelab's Upcoming Products And Tactical Communications Expansion Will Strengthen Market Position In Future

Key Takeaways

• Codan's acquisition strategy and focus on recurring revenue are set to improve revenue stability and net margins.
  
• Innovation in Tactical Communications and new product launches by Minelab are aimed at boosting market share and revenue growth.
  
• Acquisition strategy increases costs and financial risks, while reliance on Communications segment and geopolitical factors pose threats to revenue stability and diversification.

Catalysts

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

• Codan is targeting organic revenue growth of 10% to 15% in its Communications segment, and with the recent acquisition of Kagwerks, overall revenue growth in this segment is expected to exceed 15%. This is likely to boost revenues significantly as the Communications segment is the core growth driver for the company.
  
• The company is focusing on increasing its Communications segment profit margins from 27% to a targeted 30% over the next 2 to 3 years. This improvement in operational leverage will positively impact net margins and earnings.
  
• Codan's acquisition strategy, particularly recent acquisitions like Kagwerks, aims to enhance revenue quality and predictability. The addition of recurring revenue models or contracted revenues is expected to bolster both revenue stability and net margins.
  
• The company is optimizing its product offerings in Tactical Communications, including developing a multi-waveform radio solution through a partnership with TrellisWare. This innovation will expand Codan's addressable market and is expected to drive revenue growth and increase competitive positioning.
  
• Minelab is releasing the next generation of detectors over the next 6 to 12 months and expanding its market through new product launches and increased retail and e-commerce presence. This is anticipated to strengthen market share and enhance revenue and earnings.

Codan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Codan's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.1% today to 18.6% in 3 years time.
• Analysts expect earnings to reach A$152.6 million (and earnings per share of A$0.77) by about February 2028, up from A$89.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2028 earnings, down from 32.8x today. This future PE is lower than the current PE for the AU Electronic industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Codan Future Earnings Per Share Growth

Risks

• The acquisition-driven growth strategy, while promising, increases expenses and potentially dilutes margins due to integration costs and initial lower profitability of acquired entities. This could impact the net margins and overall earnings.
  
• Rising net debt, augmented by acquisition-related expenditures, could increase financial risk, affecting the company’s ability to finance future growth and impacting net income due to higher interest expenses.
  
• Heavy reliance on the Communications segment for revenue growth, particularly driven by Tactical Communications, poses a risk if demand for these products declines, which could negatively impact revenue stability and diversification.
  
• The unpredictability of the African market for Minelab, complicated by regional disruptions like those in Sudan, presents a risk that could affect revenue and create volatility in earnings.
  
• The geopolitical environment, particularly concerning U.S. political changes and military spending, poses a risk to the Tactical Communications segment, which could potentially disrupt revenue streams if programs are canceled or reduced.

Valuation

• The analysts have a consensus price target of A$16.825 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$18.14, and the most bearish reporting a price target of just A$14.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$819.5 million, earnings will come to A$152.6 million, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$16.16, the analyst price target of A$16.82 is 4.0% higher. 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.