Why Codan Satisfies My Inner Geek

In Adelaide, well away from Australia’s better known tech centres, is a small, innovative company that is leading the world in the technology it creates. It’s called Codan (ASX:CDA). And once you read about it, I think you’ll agree that this is a company that’s worth a second look.

First I have to let you know that I am an engineer by training with a Master of Science in Engineering. Although I haven’t actually done any engineering in its traditional sense after finishing university, I am fascinated by and very interested in technology and I’m probably what many people would call a geek.

Being a bottom-up investor means that to build conviction in an investment, you really have to do a deep dive into a company and understand, to a very detailed level, what it is doing. As the analysts here at Montgomery do not specialise in particular sectors, it means that we get to look at many different companies operating in different sectors. Different sectors are all interesting and fascinating in different ways, but I will always have a sweet spot for cool technology!

This leads me to the company I want to describe today which has some very cool technology indeed!

The company is called Codan. It’s based in Adelaide and has a market capitalisation of $425 million, so it is not very big. Despite its size, one of its divisions is the clear worldwide market leader in its field while another division has developed a very interesting technology that could be used for automating mine operations.

Let’s start by looking at the biggest division at Codan: Minelab.

Minelab

Minelab, which is the name of Codan’s metal detection division, is the world leader in metal detection machines.

You have probably all seen the people walking along your local beach in the evening waving a metal detector over the sand in the hopes of finding lost treasure (coins, rings, watches etc.) that people have dropped during the day. There is a very decent probability that the metal detector these people are using is made by Minelab as they have a very significant market share of this market even though there are a few competitors out there. Minelab has recently launched a new metal detector called the Equinox (pictured below) aimed at the recreational market and the early reviews of the product are very encouraging.

Screen Shot 2018-03-16 at 9.10.10 am

However, the recreational metal detection market is relatively small compared to the gold detection market, where Codan sells machines that retail for US$ 10,000. These gold detectors are used by independent gold prospectors mainly in Africa. They have a very strong market share in Africa and have been experiencing very strong sales of their flagship GPZ7000 product (pictured below) over the last eighteen months.

Screen Shot 2018-03-16 at 9.10.42 am

There is also the mine detection market, in which Codan has a strong market share, although it is much smaller than the gold detection market.

What is really interesting with Minelab is that because they are active in all the three different parts of the metal detection market, they are able to spread development costs across more products and keep a technological advantage over the competition.

When you go deeper into the technology behind metal detection, it is indeed very cool technology and Codan has got a very strong market position in this niche market!

And then there’s Minetech.

Minetech

Minetech is the other very interesting division of Codan.

Quite a few years ago, CSIRO developed a system for very precise physical tracking using “beacons” and “sensors”. CSIRO partnered with the listed company Catapult (ASX:CAT) which licenses the technology for tracking the performance of athletes. If you have seen the statistics on how far a footy player has run during a game, Catapult has most likely been involved measuring this.

Why is this relevant for Codan you might ask? Minetech, which Codan acquired a few years ago, has the exclusive licence with CSIRO to use the same technology to track vehicles and personnel in mines. Their system can be used to pinpoint the location of a truck or a worker to 3 centimetres precision whereas the competing system has a maximum precision of 3 metres. Three metres is not reliable enough to enable automated vehicles, but 3 centimetres is. Codan has also recently announced that they have signed a cooperation agreement with Caterpillar (CAT US) which is the world’s largest manufacturer of mining equipment.

Other areas

Codan also makes radio communication equipment for use by military and public services etc. This is also an interesting market (and indeed cool technology) but Codan’s market position is not as strong as in the metal detection market.

It is quite rare to find companies in Australia that combine very strong market position in a very specialised field with advanced technology but Codan is one of them. For me, analysing these kind of companies is one aspect of my job that makes it very interesting as I satisfy my inner geek at the same time as trying to find good investment opportunities.

The Montgomery Funds own shares in Codan. This article is prepared 16 March 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Codan you should seek financial advice.