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A gold rush for Codan?

A gold rush for Codan?

With reporting season in full swing and the sheer volume of information to stay on top, if a business’s outlook statement fails to deliver on certain investors’ expectations, in some cases this can quickly lead to “shoot first and ask questions later” situations, which can at times create large price inefficiencies.

Consider Codan’s statement in their annual report which was enough to see the shares fall 20% on the day.

We enter FY14 without the record level of sales momentum of gold detectors, and therefore we expect to return to profit levels more consistent with the first half of both FY11 and FY12, with net profit in the range of $10 million to $ 12 million. While we remain confident of delivering another good result in FY14, it’s still early in the year and therefore we plan to provide a further business update at the company’s annual general meeting in October 2013.

Despite a record year with earnings up by 97 per cent, which we believe will be the peak level for a number of years, management were clearly cautious in their results presentation, after overpromising and under delivering last year.

In their attempt to be conservative, perhaps management have swung too far the other way as the above was clearly taken as the outlook for the business has materially deteriorated.

If one spends a little-more time digging however, they might uncover management’s less-conservative guidance. The final paragraph is perhaps the key:

The company announced a final dividend of 7 cents per share, fully franked, bringing the full year dividend to 13 cents compared to 9.5 cents for FY12, and increase of 37 per cent. The dividend has a record date of 13 September 2013 and will be paid on 1 October 2013.

Codan has a long history of delivering a sustainable and progressive fully franked dividend payment to shareholders. Since the company listed in November 2003, the company’s yearly dividend has increased from 5.5 cents per share to 13.0 cents per share for the year ended 30 June 2013.

The Board’s objective is to pay a dividend that is considered sustainable and that has a payout ratio of at least 50 per cent.

From this comment, it’s entirely possible to infer that management here are suggesting that their budgeted figures might dwarf their guidance of $10m to $12m for the first half or $20m to $24m annualised.

Our read-through (which might be entirely incorrect) on management intending to maintain their dividend of 13 cents per share, a 50 per cent payout ratio to what they consider “sustainable earnings” is that the result they are budgeting for could be for FY14 earnings per share of 26 cents.

In the past 12 months, Codan has shown just how lumpy its earnings can be, so it’s impossible to say with 100 per cent confidence that 26 cents EPS will be the right number. Instead, using a range of 20-26 cents EPS and versus a share price of $1.80 may indicate that investors have overshot the mark this time.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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  1. Simple Investor

    Question management’s strategy. Look at their Mining tech and Communications acquisitions. The tech acquisition has lost money and the communications one has significantly decreased that segments financial returns.

    The value of this compnay seems to swing on the (very profitable) gold detector business, which generates good returns, but has demand which is highly volatile and a product that is subject to counterfeit and competitors who can produce at lower cost and greater scale.

    • Interesting their December trading update highlights the volatility to the downside. Fair to say not sure mgmt has much control over demand.

  2. Hi Roger
    Fantastic article.
    I was one of the people fortunate enough to buy in at the $1.50 level in July.
    For me, after reading the announcement, my decision to sell came down to the certainty of the profit versus the uncertainty of management looking forward. So I was more than happy to exit the stock at $2.11 with most of my profit intact. For now I will sit on the sidelines and wait for management to hopefully provide a trading update at the AGM before deciding on whether to buy back in.

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