Codan Limited (ASX: CDA) shares are now back to where they were at the low of the COVID-19 crash in 2020. Two years of disappointing performances have placed the communications and metal detection company's shares 77% below their 2021 high of $19.33.
Despite the backward move, this S&P/ASX 300 Index (ASX: XKO) member has delivered an outstanding 127% to its shareholders over the past five years when including dividends.
Here's a look at why I'm planning to load up in an attempt to more than triple my investment.
Detecting an undervalued ASX 300 share
At first inspection, you might notice that Codan's revenue and net profits after tax (NPAT) were at all-time highs in the last financial year. Then why would the company's share price be down almost 47% over the previous 12 months?
As always, the market is forward-looking. For Codan, the future isn't quite as bright for its metal detection segment as in prior years.
In FY22, sales for its detecting products tumbled 20% year on year. Adding to the pain, management is forecasting up to a further 45% slump in detector sales in the first half of FY23. The cause of this waning demand is said to be a reduction in sales in Africa — specifically Sudan — due to a military coup.
Undoubtedly, this has weighed on the optimism among shareholders. The company will be left with a $58 million to $63 million hole in its sales. Unless Codan can grow other markets rapidly or secure some huge communications contracts, this will likely manifest in a weaker profit in FY23 for this ASX share.
Nonetheless, the company has a long track record of expanding into new markets. Likewise, Codan's management has proven its ability to make sound ad-hoc acquisitions to its communications offering.
These two factors combined give me faith that the company will be able to grow its top line at around 15% per annum post-FY23.
| Financial year | Revenue projection | Earnings projection |
| FY23 | $446 million | $67 million |
| FY24 | $513 million | $82 million |
| FY25 | $590 million | $95 million |
| FY26 | $678 million | $122 million |
| FY27 | $745 million | $134 million |
| FY28 | $820 million | $164 million |
Dividends could supercharge returns
Codan has returned to a net debt position on its balance sheet following numerous acquisitions over the last couple of years. Currently, the debt level looks maintainable for this ASX share. However, if profits fall this year, dividends most likely will also head south.
The company has a goal of paying around 50% of after-tax profits back to shareholders using dividends. As a result, FY23 might be disappointing on the income front for Codan investors. However, sharing in a 50% distribution of profits and reinvesting those using a dividend reinvestment plan (DRP) could greatly increase total shareholder returns in the long run.
While they haven't been the most consistent over the years, Codan's total dividends have trended higher over time — as shown above.
If this ASX share can regain its footing, reaching $164 million in NPAT by FY26 in the process, I believe Codan is a real contender for tripling my money.
