Codan Ltd (ASX: CDA) shares have been on a rollercoaster since the pandemic.
After reaching an all-time high of nearly $20 in 2021, Codan's share price slumped 80%, leaving investors wondering whether the good times were over.
Since then, Codan has made a remarkable recovery. At a share price of $16.30 (at the time of writing), a new all-time high is once again in sight. Will it get there?
What does Codan do?
Founded in 1959, Codan is a market-leading Adelaide-based metal detection and communications business. During its early years, it manufactured high-frequency radio products for the Royal Flying Doctor Service.
Today, it operates through two operating segments: metal detectors and communications. Its metal detection business is conducted through Minelab, which it acquired in 2006. Its communications business designs and manufactures mission critical communications solutions for the military, public safety, law enforcement, unmanned systems, and broadcast markets. This segment comprises Domo Tactical Communications and Zetron, both acquired in 2021. In 2023, Codan also acquired Wave Central, further strengthening its communications profile.
Codan's 5-year transformation
While Codan has been listed on the ASX since 2003, its recent history can be characterised by three periods. Prior to the pandemic, Codan's metal detector segment dominated, accounting for 70% to 80% of revenue.
During the pandemic, demand for metal detectors surged. Sudan's artisanal gold mining market was its major market. However, this reversed in 2022, putting considerable downward pressure on Codan's share price.
Since then, Codan has diversified its operations. Through its communications-related acquisitions, communications have become Codan's dominant revenue source. This move has allowed Codan to enter large and growing addressable markets.
Will Codan's transformation pay off for investors?
While Cognitive Market Research expects the global metal detector market to grow at a compound annual growth rate (CAGR) of 6.7% between 2024 and 2031, the metal detector industry is highly susceptible to booms and busts. This was evident between 2021 and 2022, causing Codan's share price to fall 80%.
Codan's recent focus on communications allows it to generate more sustainable and recurring revenue through contracts with government and other public bodies.
Current government spending priorities also favour this transition. According to Stockholm International Peace Research Institute, Global government spending reached US$2443 billion in 2023, increasing 6.8% from 2022. This was the steepest year-on-year increase since 2009. With geopolitical tensions heightened, spending is likely to stay elevated.
However, for investors, Codan's expanded market opportunity comes at a price.
The company is currently trading at a price-to-earnings (P/E) ratio of 36 times earnings. While this is significantly above its five-year average of 22, Codan has transformed over this period. Today, it is a vastly different business with a more diversified and reliable earnings base.
Codan also has far greater upside potential, with communications being a significantly larger addressable market than metal detection.
Only time will tell what happens with the share price and whether a significantly higher multiple is justified.
