On Thursday, UBS initiated coverage on Codan Limited (CDA:AU) (OTC: CODAF) stock, bestowing a Buy rating along with a price target of AUD13.10 per share.
The firm's decision is based on an anticipated strong cash earnings per share (EPS) compound annual growth rate (CAGR) of 28% over the next three years, which suggests an appealing price-to-earnings growth (PEG) ratio of 0.7x compared to the approximate 2x of the ASX Small Ordinaries Index.
The expected earnings growth for Codan is primarily supported by an estimated average annual earnings before interest and taxes (EBIT) margin increase of around 150 basis points.
This increment is projected to steer the Communications division towards the company's goal of a margin greater than 30%, a significant rise from the 25% reported in FY23. Additionally, UBS anticipates Codan to maintain its track record of 10-15% organic revenue growth.
Codan's financial health is underscored by a solid balance sheet, indicated by a leverage ratio of 0.4x. Furthermore, the company's new AUD150 million debt facility is seen as a reinforcement for potential mergers and acquisitions (M&A) that could further enhance cash EPS and valuation. The price target set by UBS includes an extra AUD1.20 per share, which accounts for the potential uplift from M&A activities, representing the midpoint of the firm's acquisition scenario analysis.
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