During the Australian Gold Rush in the nineteenth century, fortunes were not made from prospecting. A far more lucrative endeavour was to sell the supplies to those who had gold fever.
Even today, there are highly profitable businesses that provide the necessary equipment for an industry rather than the industry’s end product.
One such business is Codan Ltd [ASX:CDA]. The company sells two way radios to emergency services and military operations while also providing metal detection equipment to miners.
OK, so not as exciting as gold prospecting. Yet, while miner’s burn capital searching for fortune, Codan collect cash regardless.
Codan’s Rising Profits
In FY17, Codan posted some of their best results.
Revenues were up 33% to $226 million and profits climbed 181% to $43.5 million. The company held no short-term or long-term debt. They generated $75.6 million in free cash flow, up more than 50%.
And because of their strong results, Codan also decided to pay shareholders a special dividend of 3 cents along with their final dividend of 4 cents per share.
But if this business is so great, why it is only worth 9-times earnings?
A decline in mining investment might have something to do with it. As you would expect, fewer miners exploring for minerals means there’s less demand for Codan’s products. However, so far Codan hasn’t experienced a significant drop in metal equipment sales.
Investors might also be worried about knock-offs. In 2013, Codan had a problem with African counterfeiters. It caused Codan’s sales to drop by more than 40% and for profits to drop from $36 million to $9 million.
Codan’s Future Outlook
But as Codan explained in their annual report, it’s something they’re trying to reduce.
‘We remain confident in the future success of our gold detector business in Africa. We have the world’s best gold detecting technology, our detectors have better anti-counterfeit protection and are being distributed more widely throughout Africa as a result of continuous market development.’
I’m optimistic about Codan’s future. The company has posted terrific results in the past and they are the preferred supplier within their industry. Of course you could also take a punt on a tiny gold miner. Who knows? You might get lucky.
But if you’re looking for something more certain, you might want to look at a company like Codan.
Junior Analyst, Money Morning
PS: Want to find more investments like Codan? Check out what could be the three best investments for 2017.