Codan (ASX.CDA) is guiding fiscal 2027 sales growth in its communications segment of 30%-40% from fiscal 2026, on higher sales to active conflict zones. First-half fiscal 2027 group net profit after tax is guided to at least $160 million, more than double a year ago. Shares rose as high as 24% on Sept. 30.

Why it matters: Strong guidance reflects the exceptional use of drones in combat, driving demand for Codan’s drone communication devices. Sales to customers in conflict regions are estimated to be half of first-half fiscal 2027 communications segment revenue, from 20% a year ago.

  • In the communications segment, about 55% of group earnings, we now estimate fiscal 2027 sales growth of 35%, at the midpoint of guidance. Our EBIT margin estimate of 39%, from 31% a year ago, reflects the sheer operating leverage from higher sales volumes.
  • In Minelab, about 45% of group earnings, first-half fiscal 2027 revenue is tracking slightly above the second half of fiscal 2026. This is already captured in our estimates. Sales are buoyant due to high gold prices encouraging prospectors, new product launches, and global brand expansion.

The bottom line: We lift our fair value estimate by 13% to $31 per share for narrow-moat Codan, on upgraded EBIT margin forecasts for the communication segment. However, we don’t expect demand to stay at this elevated level, and project a step-down in growth from fiscal 2028.

  • Shares are expensive, trading at more than double our valuation. We believe the market is extrapolating the current pace of drone communication sales growth, seemingly assuming active conflicts, including the Iran and Russia-Ukraine wars, to persist over the long term.
  • We assume a 10-year revenue compound annual growth rate of 12% for the drone communication business, and 10% for the metal detection business. We expect a midcycle group EBIT margin of 36%, from 34% now, with improving operating leverage offset by falling lower-margin Minelab sales as the gold price retreats.

Codan’s communication sales soar on demand from customers in active combat

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 revenue growth in the high single digits for its communications product Zetron, and low teens for its 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 6% of group 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 historical 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 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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