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Why this small cap share zoomed 9% higher today

One of the best performers on the local market today has been the Codan Limited (ASX: CDA) share price.

Its shares zoomed 9% higher to a multi-year high of $3.31 in morning trade before finishing the day up 8% at $3.28.

Why did Codan’s shares hit a multi-year high?

This morning the technology solutions provider released a strong full year result for the 12 months ended June 30 and announced a special dividend for shareholders.

In FY 2018 Codan delivered total revenue of $229.9 million and an underlying net profit after tax of $39.8 million. This was a 1.7% increase and 11% decline, respectively, on FY 2017’s result.

Underlying earnings per share came in at 22.1 cents, allowing the board to declare a final dividend of 4.5 cents per share. This brought its full year dividend to 8.5 cents per share or 12.5 cents per share when including the special dividend.

A strong performance from its Metal detection business was the driver of its top line growth and offset a weak sales result from its Communications segment.

Source: Company presentation

While Codan may have reported a decline in earnings, when it comes to its results it is always best to focus on its base-business performance. This strips out the outperformance that can occur from time to time.

In FY 2018 management estimates that base-business sales increased to $180 million to $200 million, up from $160 million to $180 million last year. Base-business net profit after tax increased to $25 million to $30 million, up from $20 million to $25 million.

As I mentioned above, the star of the show this year was its Metal detection products segment. The company’s Minelab business previously had base-business sales in the range of $85 million to $95 million per annum, but the Equinox coin and treasure product release, coupled with an expanded gold detector range and Minelab’s entry into new markets, has now increased the base-business to approximately $110 million per annum.

Management advised that the segment’s strong performance was driven by increasing demand for its top of the range GPZ 7000 gold detector and significantly higher sales of its new Gold Monster and SDC 2300 detectors in Africa.

The company’s Tracking Solutions segment had a positive year but is not yet making a meaningful contribution to its overall sales. However, this could change in the future if it can build on its deal with mining giant BHP Billiton Limited (ASX: BHP). Earlier this year the company announced that its Minetec business secured a $9.5 million contract to supply the Fleet Management system to BHP’s Olympic Dam mine in South Australia.

Outlook.

While no guidance was provided for the year ahead, management remains committed to growing the company’s base-business. It intends to provide a trading update at its annual general meeting in October.

Should you invest?

I think Codan is a quality business and well worth considering. Based on today’s result, its shares are changing hands at a little under 15x earnings. I think this is an undemanding valuation for a company that is capable of growing its base-business at a solid rate over the long-term. In light of this, I would class Codan as a buy.

In addition to Codan, fellow small cap technology companies ELMO Software Ltd (ASX: ELO) and Praemium Ltd (ASX: PPS) could be worth a look.

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