Ann: Investor Presentation, page-99

I've been doing some DD on CDA as of late given the tumultuously bad run the stock has been on in the past 18 months (~70% off the peak at >$19).

What I'm beginning to learn is that the market is becoming quite confused with CDA's earnings profile and this is somewhat understandable when you compared the businesses that sit under the CDA 'hood'.



I will start with the well-established Minelab business which has 3 disparative markets as displayed in the above photo.

Recreational - This division serves metal detectors into established and 1st-world geographies such as the US and Australia. Recreational contributed majorly to the recent success of Minelab in FY21 and this was somewhat driven by the economic stimlus that was pumped into the relevant economies. I believe there was a lot of pull-forward demand in FY21 and FY22 that will need to be cycled out in FY23. (The CEO acknowledged this and expects H1 FY23 to have negative sales).

Gold mining - Sells predominantly into African markets where small scale artisanal miners detect gold as a primary source of income in many cases. This market has been heavily disrupted by the military coup in Sudan. A number of $20m in sales was lost in FY22 ($40m p/a) due to the geopolitical issues across Africa + Russia. These geopolitical issues continue to occur today.

Countermine - Landmine detectors sold into military, defense and security markets. I believe this is one of the only three markets that will have tailwinds into FY23.

Note - this markets tend not to move in unison and all have individual variables that are currently impacting performance, the majority of which are headwinds in the case of Recreational and Gold Mining.

The communications business made up of DTC & Zetron both serve different markets and offer completely different products. Management are confident above the performance of these businesses and we can expect something in the double digits for revenue growth. We can also expect to see some margin expansion here due to the fixed cost operating leverage that will occur during the year.




When comparing the margins we can see that Minelab runs at >2x communications and contributes much more to group EBITDA.

Given that communications revenue growth is accelerating and Minelab is in decline we have a falling margin at the group level. (Falling 300 bps from 37% in DH20 to 34% in the recent JH22). It is my belief that the group margin will continue to fall, especially in 1H FY23 as the communications division grows while Minelab shrinks and rebases.



What I am trying to figure out is if the communications business revenue growth and margin expansion is enough to offset the falling MineLab earnings, and where these Minelab earnings eventually fall to.

The market appears to be digesting a business that has falling margins at a group level and is ascribing a view that CDA was a 'covid-winner' that overly benefitted from fiscal stimlus as similarly seen with many e-commerce stocks.

I think this is definitely a factor for the recreational market of Minelab, but how much of this has already been absorbed into the share price? The stock is on ~10x FY22 P/E which likely anticipates that earnings will go backwards in FY23(f) and puts something like a 15x P/E on the lower FY23 earnings.

I believe the risk at this price is to the upside.

I have not concluded my opinion on CDA, nor do I have a position.