Most investors wouldn't think of drones initially when thinking of Codan Ltd (ASX: CDA), with the company having traditionally based its business around radio communications technology and metal detector sales.
But the company's DTC division, which it acquired back in 2021, has developed radio technology for use on drone platforms, which has piqued the interest of the analysts at Macquarie.
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Major opportunity for ASX drone players
The Macquarie team said in a recent note to clients that there is expected to be exponential growth in drone spending, citing a recent NATO initiative called "drone edge", which envisages US$40 billion worth of investment in the sector from more than 30 countries.
They added:
As we mentioned in a previous report, the US Department of War's 2027 budget overview includes US$53.6bn in funding for drone and autonomous systems and US$21bn for counter drone technologies. This dedicated investment into autonomous systems' procurement, domestic production capacity and advanced capabilities is being divided across multiple specialised programs.
They said in relation to Codan:
When encompassing estimated communication layer drone costs and US-specific programs, together these frame a large, multi-year, structurally growing US demand pool that plays directly to DTC's niche. DTC's key offering of resilient datalink, mesh-networking and electronic warfare hardened communications layer is directly linked to various components that multi-domain drone and unmanned systems require.
The Macquarie team said beyond the US, "DTC also has significant opportunities in the European region as noted by management back at the 1H26 result''.
They added:
Europe has emerged as a structurally attractive opportunity as the recent step-change in defence spending driven by the war in Ukraine and NATO eastern-flank deterrence is flowing into unmanned-systems and resilient communications categories where DTC competes.
Macquarie said the Asia-Pacific region was also shaping up as one of the most compelling regions for DTC, driven by a surge in defence spending.
Australia itself was a "high-conviction oppoprtunity", with the company's radios already selected for the Land 129 UAV project.
Macquarie added regarding the company:
To meet surging international demand for secure communications solutions as a part of the increasing demand for drones and uncrewed systems, DTC has established a multi-country manufacturing footprint, expanding production outside the US. The newer established manufacturing locations for DTC, the United Kingdom and Australia, help to de-risk global supply chains. This expansion in manufacturing positions DTC well to capture opportunities across different regions globally.
Shares looking cheap
Macquarie has a price target of $48.50 on Codan shares compared with $43.25 currently.
The company is valued at $8.09 billion.
