Expansion In Marine Technology And US Defense Orders Will Strengthen Future Potential

Key Takeaways

• Anticipated increase in U.S. Defense orders expected to boost future revenue growth, alongside a strategic move towards a recurring revenue model.
  
• Expansion in Marine Technology and strategic acquisitions aimed at broadening revenue streams and improving market positioning.
  
• Reliance on U.S. Defense Programs and operational costs could impact Coda Octopus Group's growth, revenue stability, and profitability amidst political cycles and acquisition risks.

Catalysts

Develops, sells, and rentals underwater technologies and equipment for real time 3D imaging, mapping, defense, and survey applications in the Americas, Europe, Australia, Asia, the Middle East, and Africa.

• The anticipated resolution of the funding gap due to the U.S. presidential election is expected to result in an increase in orders from U.S. Defense Programs, positively impacting future revenue growth.
  
• Expansion of the Marine Technology Business and the notable increase in utilization of rental assets are projected to continue boosting gross profit margins.
  
• The increase in the Engineering Business's revenue and gross profit margin suggests a strong future growth trajectory, positively affecting net income.
  
• Strategic focus on embedding technologies into defense and other programs for multiple-year purchases signals a move towards a recurring revenue model, likely enhancing long-term financial stability and earnings predictability.
  
• The potential acquisition intended to expand the group's capabilities and the focus on complementary capabilities for defense applications indicate strategic growth efforts that may broaden revenue streams and improve overall market positioning.

Assumptions

• Analysts are assuming Coda Octopus Group's revenue will grow by 17.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $7.3 million (and earnings per share of $0.62) by about December 2027, up from $3.0 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 20.4x on those 2027 earnings, down from 30.7x today. This future PE is lower than the current PE for the US Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

• The slowdown in the placement of orders concerning U.S. Defense Programs due to the funding gap created by the election could result in lower-than-expected revenue and affect the company's growth strategy if this trend continues or worsens.
  
• Sales to North America being down due to the U.S. Presidential election cycle and the convention to delay decisions on defense acquisitions could lead to fluctuations in revenue and potential impacts on financial performance in the near term.
  
• The reliance on the U.S. Defense Programs for growth strategy could pose a risk to long-term revenue diversification and stability, potentially affecting net margins if diversification plans do not materialize or defense spending is cut.
  
• Increased operating expenses, particularly in selling, general and administrative costs, if not accompanied by proportional revenue growth, could squeeze operating margins and net income.
  
• The planned use of cash for an acquisition carries execution and integration risk, which could affect short-term financial liquidity and long-term profitability if the acquisition does not perform as expected or integration challenges arise.

Valuation

• The analysts have a consensus price target of $11.0 for Coda Octopus Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $30.8 million, earnings will come to $7.3 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of $8.23, the analyst's price target of $11.0 is 25.2% higher.
• 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.