We have successfully recommended Codan (ASX:CDA) in the past, given its highly-attractive fundamentals and growth path. We recently researched the Company in The Dynamic Investor after it reported results for the six months to 31 December 2025 (1H26). With the shares having risen significantly since our initial recommendation, we consider whether the recent pullback presents another entry opportunity.

About Codan

Codan engages in the provision of technology solutions and reports results across two operating segments: Communications and Metal Detection. The Communications segment includes the design, development, manufacture, and marketing of communications equipment. The Metal Detection segment includes the design, development, manufacture, and marketing of metal detection equipment, via the MineLab business.

Within the Communications segment, there are two businesses: Domo Tactical Communications (DTC) and Zetron. DTC is a leading communications solutions provider to Military, Special Forces, Intelligence Agencies and Border Control using its IP protected MIMO MESH technology. Zetron is a global communications solutions provider to command & control centres.

Key Fundamental Drivers

Unmanned Systems a Major Growth Driver for Communications Segment

The Communications segment is on track to deliver previously-advised guidance of +15-20% revenue growth FY26. Given that revenue growth was tracking at the top end of this guidance range in1H26, it is unlikely that the full-year growth in FY26 will remain at the top end. This is due to the impact on Zetron Americas’ trading conditions, which have been impacted by slower procurement cycles and deferred orders.

Over the medium-to-long term, the Company is leveraged to strong demand for unmanned systems. These are taking a larger proportion of defence budgets, as many European and other countries beef up their militaries amid global geopolitical tensions. Drone manufacturing and development in Ukraine will provide a robust growth channel for DTC in the medium term. However, there is also a likely a quicker boost to demand from European countries, and key Asian countries (South Korea, Taiwan and Japan) as they adjust to new US–NATO realities and perceived threats from Russia and China.

In context, revenue from unmanned systems increased by +68% to $73m in 1H26, accounting for ~1/3rd of revenue for the Communications segment. Around half if this current revenue base is related to operational defence in conflict zones. The balance driven by the adoption of DTC’s technologies across non-conflict defence zones in Asia, the US and Europe. Growth rates across both conflict and non-conflict applications (including Asia, US & Europe) were broadly consistent, reinforcing the structural expansion of the global unmanned systems market.

Metal Detection Well Leveraged to Gold Prices & New Products

Revenue in 2H26 is expected to be at least in line with 1H26, supported by gold prices and new products. Regarding the latter, early feedback on the newly launched Gold Monster 2000 has been very positive. Further, the MineLab high-end detector launch is scheduled for release in coming weeks, with GPZ, GPX range updates.

There is upside risk to Company sales guidance for 2H26, given that CDA has often been conservative on MineLab guidance. This is despite currently being in a strong upcycle underpinned by: i) Strong execution of strategy including increasing distribution, sales teams, e-commerce, i) New product releases and iii) Strong gold market conditions.

Operating Leverage Expected to Expand Further

Management reaffirmed its target to reach a 30% segment profit margin by the end of FY27 (1H26: 26.3%). This target has been brought forward to the end of FY27 (previously FY28), supported by ongoing investment in product development to support long-term growth. Further margin gains are expected as revenue grows and integration benefits from Kägwerks materialise.
Margin for the Metal Detection segment expanded from 36% in 1H25 to 45.4% in 1H26. This reflected a higher proportion of sales from high-margin gold detector products. The Company believes that margin is sustainable, with strong growth not only in Africa but also Australia, APAC, LATAM, and Europe.

Strengthened Balance Sheet Capacity to Support Further Acquisitions

Gearing (on a net debt to EBITDA basis) is modest, at 0.4x. CDA has improved balance sheet capacity after increasing and extending an existing banking facility. This supports further growth via Merger & Acquisition (M&A) opportunities

CDA’s M&A strategy has centred on diversifying earnings away from the volatile Africa Metal Detection market and into the more predictable and larger Communications market. This began with the $159m acquisitions of Zetron and DTC in 2021. The improved balance sheet capacity offers CDA the potential for accretive adjacent acquisitions that enhance the product suite, service offering and geographical reach of the DTC and Zetron businesses.

In the absence of M&A opportunities, we expect continued strong operating cashflow to push gearing down further. Free cashflow levels are supported by minimal CAPEX requirements, which in turn support ongoing dividend payments.

Fundamental View

At current levels, the risk-reward is becoming more balanced. The 1-year forward P/E multiple of ~39x is starting to look stretched relative to an EPS growth profile of +24% over FY25-28 on a CAGR basis. For the shares to re-rate from current levels, another growth leg in the form of additional EPS-accretive acquisitions may be required. To this end, it is worth noting that the addition of EPS-accretive acquisitions over the last three years have underpinned a progressive re-rating over the last ~12 months.

Charting View

In our last charting comment on 23 December in The Dynamic Investor, we noted that “we would like to see it trade back above the nearby resistance line at around $31.50. It can get above that and hold, then we would be treating that as the buy signal.” After rallying to over $40, CDA then spent most of February easing back again. This pullback now appears to be over and we expect another short-term recovery in the share price. Initial stops can be considered back near $32.

 

Michael Gable is managing director of Fairmont Equities.

 

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