Macmahon Holdings: Margins Key To Re-Rating

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Macmahon Holdings experienced a half year earnings hiccup which coincided with a market selloff and de-rating of small cap stocks. Is the valuation discount now too steep to ignore?

-Sixty year-plus track record a boon for Macmahon
-First half earnings a miss on margins
-Restructuring of the service mix a focus for management
-Too cheap to ignore (?) and what about potential corporate action?

By Danielle Ecuyer

A long history for Macmahon

With a $600m market cap, Macmahon Holdings is ranked as a small cap in the mining and civil contracting space with currently a low valuation but a compelling growth story to tell.

As a small cap, the company often flies under the radar, with Bell Potter the most recent broker to initiate coverage. So far, Bell Potter is the only one among daily brokers monitored by FNArena.

Management has a clear strategy to target a diversified sector revenue exposure, comprised one-third from surface mining (part of contract mining), one-third from underground mining, and one-third from civil infrastructure.

The latest 1H25 results showed a 60% revenue mix to surface mining, with underground at 23% and infrastructure at 17%. As a comparison, back in FY18 surface represented 90%, with 7% from underground, and 3% from infrastructure.

The aim is to lower the capital intensity of the services provided to generate a return on average capital employed of 20% versus 17.5% in 1H25 or annualised at 18.2%.

Surface mining contracts are notably very capital intensive, for which Macmahon employs debt or lease funding to secure the capital equipment.

In contrast, underground mining and infrastructure are less capital hungry. Bell Potter notes, while lower capital needs allow for higher return on capital and lower barriers to entry on scaling the business, this segment also brings forth more competitors and lower margins.

For examples, earnings (EBITDA) margins of 17% decline to 7%-8% once depreciation charges, associated with capital equipment, are backed out.

By commodity, gold generated 54% of 1H25 revenue, with met coal at 20%, lithium at 8%, and other some 14%. Australia represents 92% of the pie with 8% offshore in Malaysia and Indonesia.

With a track record going back to 1963, data sourced from FactSet as shown on FNArena’s Stock Analysis shows management has successfully doubled revenue between 2019-2024.

Bell Potter observes the company has achieved a 12.2% compound average growth rate between FY21 to FY25, which is attributed to winning additional contracts and retaining/extending existing contracts.

Not unlike other companies, the covid era provided downward pressure on EPS, from which the company has been looking to recover.

Management is aiming for underground mining revenue to grow by 50% over the next two to three years, which Bell Potter explains would require the addition of another two-three large mines under contract. Currently, six key mining contracts made up revenue of $530m in FY24 .

The latest results missed expectations

Macmahon’s first half 2025 earnings result had both Jarden and Canaccord Genuity questioning the strategic re-alignment of the company as well as the new business mix.

Both brokers described the EPS result as “underwhelming” relative to expectations, with “mixed messages” for investors.

Canaccord was more sanguine than Jarden, attributing the contribution from abnormal items totalling -$17m (transaction costs on the recently acquired Decmil and share-based payments) as a detraction from growth in revenue of 22% on a year earlier, and a better than expected earnings (EBITDA) margin by 6bps.

The impact of Decmil impacted margins by -15bps on the previous half.

Decmil was acquired in 2024, a civil construction company with exposure to renewables and infrastructure (roads, bridges, and accommodation), as part of the strategic realignment of the business mix and followed on the back of the 2018 acquisition of civil construction group TMM.

To date, Decmil has brought forth $333m in new work. Bell Potter suggests scaling should be possible as the balance sheet is strengthened.

Interest costs rose in the first half, resulting in a miss of -4% to Canaccord’s net profit after tax estimate. Jarden also noted the impact of lower margins and higher funding costs as weighing on the results.

Post the integration of Decmil, earnings before interest and tax margins fell by -50bps in the first half compared to a year earlier.

Management nevertheless retained FY25 guidance at the February earnings report, with Jarden stressing the outlook is dependent on whether the company can meet the targeted 8% earnings before interest and tax margin.

Both brokers concur with such a robust order book, valued at $4.3bn, which excludes contract extensions and variations of $1.6bn, the swing factor for achieving forecast (downgraded) earnings will be the margin.

Jarden emphasises the earnings split between first and second half is favouring the latter by a ratio of 45% to 55%. Challenging weather conditions and the transitioning business mix may provide headwinds in the current second half period.

Focusing on the debt situation, timing issues on Decmil resulted in a rise in net debt by 62% on the previous half to $237m, but according to Canaccord, a decline to $159m by the end of fiscal 2025 is likely.

The potential scope for the sale of the underperforming accommodation assets Homegrown has not been incorporated, although brokers covering the stock concur the asset has been flagged as “non-core” with a reasonable possibility of being divested in the year ahead. Proceeds are estimated between $50m-$100m-plus.

Contract extensions a positive

In a recent update in April, Petra Capital highlighted contract renewals have removed perceived risks around the 2025 outlook.

The company announced contract extensions for Vault Minerals’ ((VAU)) Deflector underground gold and copper mine, worth circa $105m over two years; and Genesis Minerals’ ((GMD)) Gwalia and Ulysses underground gold mines at around $67m for thirteen months.

The analyst estimates additional revenue of $114m in the next 12 months which represents around 4.6% of the forecast revenue for a comparable period. Notably, all contracts with a slated expiry in 2025 have been extended.

Against the upward revision by management for a 20% margin, from 15%, Petra suggests the pricing of the contracts, while not announced, is likely to be favourable.

Valuations and M&A opportunities

There is no doubting the April market sell-off, combined with worse than expected first half results, has underpinned an almost -40% decline in the share price from 52-week highs around 39c.

Accompanying the earnings downgrades, the market has de-rated the valuation ascribed to the stock to levels around a five times 12-month forward-looking price-to-earnings ratio (PER).

Bell Potter, in initiation of coverage with a Buy rating and 40c target price, stresses the deep discount Macmahon shares are trading on relative to some of its peers.

Across the broker’s universe of industrial/mining service providers, the FY25 average PER stands at circa 11.5x and FY26 around 10x.

Due to the risky nature of Contractors’ business, including costs running over budget, the sector traditionally trades at more modest PE multiples than the ASX200.

By any comparison, Macmahon has been given the proverbial ‘cold shoulder’ from the market, probably until management can generate more certainty around earnings margins and the transition via the Decmil acquisition.

Comparing the company to Perenti ((PRN)) is reasonable, Bell Potter espouses, with both operating in similar businesses including a high exposure to gold projects in WA, at 62% for Perenti and 54%-58% for Macmahon.

Both peers have also grown through acquisition, although Perenti is larger with a $1bn-plus market cap. Bell Potter even proposes a merger would make sense.

While downgrading EPS estimates by -8.3% and -3.6% for FY25/FY26 at the half-year mark, Jarden maintains a positive stance, emphasising an Overweight (Buy-equivalent) position and, based on its updated discounted cash flow model, a higher target price of 34c from 32c.

Canaccord Genuity maintained its Buy rating with a 37c target price post half-yearly earnings, pointing to an expected improvement in earnings over the second half of the fiscal year on top of an “attractive valuation”.

Meanwhile, Petra Capital reiterates its Buy rating and 39c target price, also suggesting trading on a consensus FY25 PER of circa 5.9x (at a share price of 28c) versus the peer group at around 9.9x, with a two-year forecast compound average growth rate in EPS of 16.7% to FY26, plus a fully franked dividend approaching 6%, makes the stock look very appealing.

Petra also highlights the $179.5m in cash on the balance sheet and FY25 estimated net debt at $176.4m, which, as Bell Potter details, opens up add-on acquisition possibilities if the company itself doesn’t become a target for a potential merger or takeover.

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