Very pertinent analysis. Thanks.
In terms of margins, despite the fact that sales mix is now weighing more towards Communication with lower-margins, the EBT margin in FY22 was still much higher than pre-covid level.
2015 2016 2017 2018 2019 2020 2021 2022 1 Gross Profit 54% 56% 60% 57% 57% 56% 55.6% 56.6% 2 Total Expenses 43% 45% 34% 34% 33% 31% 26% 30% 3 EBT 11% 11% 26% 23% 23% 26% 29.9% 26.8%
The year of 2021 was an extraordinary year for many business, including Codan. If we take this outlier away, Codan has actually been on an ascending track in terms of business efficiency.
The key question now is whether CDA is capable of maintaining this margin level whilst steering the whole business towards a more balanced structure with Communication taking more weights.
I did a rough estimation for FY23 based on below assumptions:
- Mintec sales will decrease by a further 10% with segment EBIT margin (ex-Corporate overheads) remaining the same.
- Comms sales will grow 20% (Note: up to Aug., the order book value has increased by 23%) with margin increasing by 1% as benefiting from further integration synergies.
This will lead to a very modest growth of 4% in revenue and to a sales split of 55:45 between Comms & Mintec, as compared to the 48:52 in FY22.
The impact on the EBIT margin is laid out as follows:
FY22 A Mintec Com. Total 1 Revenue Contribution 52% 48% 100% 2 EBIT Margin 46% 21% 3 EBIT Contribution 24% 10% 34.0% 4 5 FY23 E Mintec Com. Total 6 Revenue Contribution 45% 55% 100% 7 EBIT Margin 46% 22% 8 EBIT Contribution 21% 12% 32.8%
The total EBIT margin will decrease from 34% to 32.8%. However, this will be offset by the taxation benefits that Codan can gain from generating more sales from Comms. As indicated by the management on the investor call for FY22 results, 24% (vs. 27% in average over the past 5 years) should be the norm for tax rates from now on.
As a final result, the NPAT margin should stay around the same level, ie. 20% for FY23.
This will not see a big lift in CDA's earnings, but the probability of a significant earnings setback seems to be low.
The share price has dropped to the same level as in 2019, whereas the earnings over these 3 years has more than doubled. This, for me, shows how extremely risk-averse that investors tend to be under extremely volatile and uncertain macro circumstances, like what we are having now. A complex business that has been constantly reshaping itself, eg. the Codan type, is certainly not the safe harbour choice for most.
All IMHO. DYOR.
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