The stock that delivered a 36% return amid a falling ASX

2018 was a year where the ASX returned a negative result overall but one stock that stood out from the crowd was Codan (ASX:CDA) which generated a total return of 36.1%.

I last wrote about Codan in October 2017. At the time I commented that market analysts were predicting profits in 2018 of $33 million and revenues of $204 million.

The actual result were profits of $42 million and revenue of $230 million. This positive surprise lifted the stock price and caused a re-rating of analyst expectations. Today forecast earnings for financial year 2019 are about 20% higher than what they were back then.

Both revenue and profits actually declined in 2018 compared with the previous year, but this was widely expected as 2017 was an exceptional year and management had made it very clear they did not expect it to be repeated in 2018.

However, looking at the trend over a five-year period it is very encouraging.

Revenue has increased by 15%pa., earnings per share have increased from 5 cents in 2014 to 23 cents in 2018, dividends from 3 cents to 12.5 cents and return on equity from 7% to 23%.

Bear in mind that 2014 was a low point for the business with revenues and earnings plunging from the record levels reached in 2013. Even with the strong growth since then they are still not quite back to the heights achieved in 2013.

Codan was founded in 1959 and is based in Adelaide.

The biggest contributor to revenue is the sale of metal detectors used for recreation, gold mining and land mine detection. Its GPZ 7000 model is considered to be the best gold detector in the world.

It also makes specialised radio communication equipment that is used in military, peace keeping and emergency services applications.

As an approved supplier for Australian Defence projects the next 10 years presents opportunities with the LAND400 Combat Reconnaissance Vehicles due to commence production in 2018/19 and the SEA5000 program (9 Hunter-class frigates) beginning construction in Adelaide in 2020.

A third element is the Minetec business which produces mine safety products. This business achieved profitability for the first time in 2018.

Minetec has entered a partnership with global firm Caterpillar whereby Minetec's high-precision tracking technology is incorporated into the Caterpillar solution used in underground hard-rock mines. Minetec also won a tender to supply fleet management systems for BHP's Olympic Dam mine in South Australia.

The results presented at the recent annual general meeting indicated that the first quarter of financial year 2019 were strong and the business was in a good position to deliver another strong result. The balance sheet is strong with zero debt and about $12 million in cash.

Despite the strong share price return in 2018 Codan is still trading at a relatively modest forecast PE ratio of 12.7. The share price has retracted 14% since the high achieved in September reflecting the general bearish sentiment in the market.

Given that this is a sentiment induced movement and does not reflect any significant change to the underlying economic fundamentals of the business it may represent a buying opportunity for those with the stomach to weather the volatility that we are likely to see in the markets in the coming months.

Disclaimer: The author's related parties have holdings in CDA

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