In a trading update, Codan (ASX: CDA) says it expects fiscal 2026 first-half revenue of approximately $394 million and underlying net profit after tax of at least $70 million, representing growth of approximately 29% and 50%, respectively, compared with the same period last year. Shares rose about 17%.

Why it matters: Codan benefits from two of the hottest market themes right now: gold and defense spending. It has sales globally, and several new products were introduced in 2025, enabling it to capitalize on higher-than-usual demand.

  • The update is in line with expectations, and we leave our $796 million fiscal 2026 revenue forecast unchanged. However, we anticipate the company can save on promotion and advertising in a high-demand environment and lift our group-adjusted EBIT margin modestly.

The bottom line: We raise our fair value estimate by 5% to $22 per share for narrow-moat Codan, on the time value of money and modestly higher adjusted EBIT margins. Shares trade at a sizable 76% premium to our valuation. We think the market is extrapolating rapid growth far into the future.

  • We already credit profit growth compounding at 14% per year for the next decade, despite the risk that high gold prices could retreat and that defense spending growth slows. Offsetting this is the less cyclical command center business supporting the modernization of 911 emergency response centers.
  • We think the overvaluation likely reflects Codan tapping into important themes, popular with investors: gold and defense. But we already credit substantial growth in our valuation from these themes. With shares trading at more than 50 times fiscal 2026 earnings, we struggle to justify the valuation.

Between the lines: Specific mention of its Zetron command center software was absent from the trading update. We believe US government shutdowns have likely stalled new sales. We expect a recovery from fiscal 2027, with emergency center upgrades considered necessary by policymakers.

Codan’s phenomenal sales growth underpinned by defence spending and gold fever

We think Codan’s expansion in the communications sector supports long-term growth, with diverse and stable earnings contributions from its command center product.

After a series of acquisitions, Codan’s communications segment contributes about half of group underlying EBIT from one-fifth in fiscal 2020. We estimate this growing as a share of group earnings to about two-thirds of earnings by our fiscal 2034 midcycle. This is underpinned by revenue growth rates in the low teens for its two communications products—Zetron and tactical communications.

In Zetron, the firm’s command center technology, we expect revenue growth from new customers and existing customers upgrading. Its main competitor is much bigger wide-moat Motorola, but we think Codan is winning new business by strategically pursuing small geographies, while Motorola pursues larger customers. Most of Zetron’s North American emergency center customers are in the lesser-populated US states.

Growth in US emergency response sales is underpinned by a nationwide upgrade to next-generation software. This is a government-mandated program for all US states to upgrade 911 capabilities to improve reliability and accessibility. There are about 6,000 public safety answering points, or 911 call centers, and we estimate Zetron is suitable for about three-fourths of these. Zetron is sold in modules, with the maximum five modules providing the most features. It already serves one-third of the addressable market with one or two modules, providing considerable runway for upgrading existing customers.

In wavelength tactical communications and metal detection products, we expect continued investment in engineering, averaging about 10% of sales, to result in market share growth and margin growth from improved operating leverage. Codan has an excellent reputation for producing high-quality engineering, with dominant market share for its Minelab metal detector product in Africa, and in the US, it is one of the two largest players. Its tactical communications product has high-quality customers, which include global militaries and large broadcasters.

Bulls say

  • Growth in emergency call center software is underpinned by the US government’s next-generation 911 software mandate, requiring upgrades of old technology and increasing the value of the addressable market.
  • Strategic acquisitions support bundling and cross-selling to existing customers, while opening the company to new customers.
  • Despite gross profit margins in the mid-50s, we expect further improvements from operating leverage as Codan increases sales volume and steady subscription revenue from call center customers.

Bears say

  • Metal detection sales are exposed to cyclicality, with a pullback from hobby customers at low points in the economic cycle.
  • Geopolitical tensions could result in global military customers shifting purchasing to their own countries.
  • Codan competes with other technology providers. A new technology introduced by a competitor has the potential to make Codan’s technology redundant.

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