smart investor article - 46.5 cents

(Smart Investor - Free subscriber article - 12 Dec 2013)

Shares in Codan will be smashed when the market opens on Thursday after the group slashed its profit guidance. The news comes after the group’s shares fell about 20 per cent in the week leading up to it entering a trading halt on Tuesday.

Two factors will drive its share price lower – the size of the profit downgrade and damage to Codan’s credibility.

The group now expects to post a first-half profit at a mid-range of $4.5 million, down from mid-range guidance of $10 million provided less than two months ago at the company’s annual general meeting.

At the time, Codan’s management said that sales of its metal-detection products had improved on the levels experienced late in 2012-13.

On Thursday, the group said that first-half sales will be in the order of $50 million, or 80 per cent lower than the previous corresponding period. It’s hard to see how a decline of this magnitude was not apparent earlier given we are less than three weeks out from balance date.

While Codan said it is totally focused on achieving a much stronger second half, it’s difficult to see how investors can have any confidence this will be achieved, when a slide in sales of this scale wasn’t detected until it was all too late.

It is hard to predict where Codan’s shares will find a bottom, but a like-for-like second-half performance based on the top end of the group’s first-half guidance would equate to a full-year profit of $10 million, representing earnings per share of 5.6¢. This compares with consensus forecasts of 15.8¢, which implied a price-earnings multiple of 8.2 relative to the company’s pre-trading halt share price.

If the same multiple is applied to these projected earnings, which imply a shortfall of more than 60 per cent compared with consensus, it would translate into a share price of 46.5¢.

Gw