A small cap ASX tech share for the long term investor

Codan Limited (ASX: CDA) reported great half-year FY20 numbers. But with its shares dropping further than the broader market, this could be a buying opportunity for long-term investors.

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On 3 March, small cap ASX tech share Codan Limited (ASX: CDA) released an investor presentation that recapped its recent half-year FY20 results. 

Codan’s half-year results were widely positive, with record revenues of $171 million, net profit after tax of $30.4 million, and $51 million in net cash. An electronics products company with a presence in more than 150 countries, over 85% of Codan’s sales come from overseas. In H1FY20, Codan saw a strong increase in demand across all its business units, including metal detection, communications, and tracking solutions.

Metal detection

Through its Minelab brand, Codan is now a world leader in metal detectors, having achieved half-year sales of over $100 million for the first time in its trading history.

Minelab provides a wide range of metal and gold detection products, targeting all levels of users —from the amateur treasure hunter to the professional gold prospector. To achieve this, Codan offers metal detectors from a starting price of US$99 all the way up to US$7,999.

As part of its offering, Codan also sells landmine detectors to NGOs and governments of countries impacted by current and past wars.

Communications

In H1FY20, Codan struck 2 strategic partnerships with both the Kenyan and Philippines governments. This is a good area for growth, as the dynamics of the large military communications segment allow for longer sales cycles and upselling. Once a partnership has been established, Codan can transition from selling individual pieces of radio equipment to becoming a full solutions provider.

Tracking solutions

Codan’s Minetec brand has managed to further secure 2 important collaborations. Thanks to its Caterpillar partnership, Minetec’s Minestar communication system was deployed into Newmont’s Tanami mine and in a large block of an Indonesian cave mine. The same Minestar tracking system was also recently installed in BHP’s own Olympic Dam mine in South Australia.

FY20 outlook

Due to strong backorders and continued strength in gold detection sales, management believes the company to be well positioned for the second half of 2020.

However, Codan admits that it might be difficult to replicate the important customers wins in the communications segment, which brought in over $21 million in H1FY20.

Codan’s recent share price performance

The Codan share price is currently $4.89 at the time of writing, down approximately 30% over the past 2 weeks, which is a steeper drop than the S&P/ASX 200 Index (ASX: XJO) has experienced in the same period.

With no significant news released since its half-year results, such a price drop could be caused by any number of reasons. As Codan shares have returned some 58% over the past year – even after the recent fall – my guess would be that investors are banking some of those nice profits.

Foolish takeaway

I appreciate how this “small” Australian company has managed to carve out its own niche in several highly specialised segments through solid execution.

I also like the board’s policy of continuing to pay out 50% of all profits as dividends. I believe this strikes the perfect balance between paying income to shareholders and retaining earnings for future growth.

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Motley Fool contributor Giacomo Graziano has no position in any of the 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 Scott Phillips.

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