Should You Buy Codan Ltd Limited At This Share Price?

What happened to the CDA share price?

Codan Ltd [ASX:CDA] was the victim of its own bubble in 2013 when its price shot through the roof to reach almost AU$4 a share. It then fell back to around AU$1.5 with a very short period of time.

However, its one year return has been quite good for tech sector investors, gaining some 50%. It has a positive 12 month revenue growth and pays a dividend. CDA is relatively cheap on a P/E basis, at around 14 times and its liquid and is not terribly leveraged. It’s also able to produce double digit net income growth, with positive free cash flows.

The company looks interesting to say to the least.

In a recent strategy study at Port Philip Publishing, I found my way to many small-cap tech companies such as Codan. Many of these companies produced a great return and I was able to make a list.

If you look at the Australian tech sector by breaking it down into smaller industries, you can find interesting companies such as ICS Global Ltd [ASX:ICS] in the health tech segment. In the hardware space, Data#3 [ASX:DTL] has been interesting to watch.rse, most high return tech companies fall into the software and services category, whereas Codan is a hardware vendor.

What should you do with CDA shares now?

When I looked at those tech companies that paid a dividend, a very interesting relationship emerged. There is a semi-strong inverse relationship between dividend yield and 12 month revenue growth.

If you pick a company that will pay a great dividend, it will have a lower growth in revenue.

It could make sense if more mature companies, with lower level growth, paid more dividends. But there was no evidence showing an inverse relationship between market caps and revenue growth, so that theory does not stand.

When it comes to return on equity, high revenue growth in a small-cap tech company does not necessarily lead to a very high appreciation in its share price.

But in my mind, strong bottom-line growth is still going to be the backbone for any company in the medium run.

This means investors need to be mindful of the trade-off between dividends and bottom-line growth when it comes to small-cap tech companies.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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