Why the Codan Limited share price soared 20% today

One of the top-performing shares on the ASX today is mid-cap business Codan Limited (ASX: CDA). Its share price rocketed as much as 20% this morning.

The shares hit a high of $1.92 earlier to mark their highest price tag in three years. They have since retreated somewhat, although they’re still trading almost 15% higher for the day compared to a mere 0.1% rise for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO).

Source: Yahoo! Finance

Source: Yahoo! Finance

Codan designs and manufactures a range of electronic products, including radio communications and metal detectors, while it also offers mining technology. The company endured a severe downturn from early 2013 to early 2014, but has made a steady recovery including a significant rise over the past 12 months, as can be seen in the chart above.

The company confirmed this morning it expected to report between $20 million and $22 million in underlying net profit after tax for the first half of financial year 2017. It also said it had achieved $74 million of sales in the four months to 31 October, which was a 76% improvement on the same period last year.

It said: “As a result of the continued strong demand for the GPZ 7000® gold detector in Africa, the performance of the business has exceeded our expectations for the month of October, and this strong demand has now continued into November.”

Investors shouldn’t expect such a strong performance in the second half of the year. Codan’s management team assume demand for the gold detector in Africa will return to more normal levels and expects underlying NPAT to be in the range of $30 million to $32 million.

Still, it’s a marked improvement on the previous financial year.

Assuming the company can achieve the mid-point of that full-year guidance, its shares will trade on a price-earnings ratio of around 10.5x. If the company can continue that momentum, it could be worth closer inspection by investors. That said, it is a risky investment prospect, so more conservative investors may want to take a look at some other options instead.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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