If you were buying Macmahon on the basis of its latest result, you wouldn’t pay a cent for it. Revenue was $360 million, 15% higher than last year. But the business lost $2 million at the earnings before interest and tax (EBIT) line and, in total, $23 million of shareholders’ money.

For those who like to look at the charts however, 2017 looked like a wonderful year. The share price has doubled and, unusually for Forager, our cautiously optimistic view is that the chart tells you more than the balance sheet.

New CEO Mick Finnegan has been busy since his appointment in October last year. Out of an opportunistic takeover bid by CIMIC in January came a silver lining: a deal with Indonesian miner AMNT, owner of the Batu Hijau mine in Indonesia. This is a world class copper and gold mine where Macmahon expects to generate revenue of US$2.9 billion over the next 14 years.

The full year run-rate of this contract is likely to be more than $500 million a year. The management team also seems confident of turning the problematic Telfer contract around well before then (we will believe it when we see it) and has a new coal mining contract almost inked.

Guidance for the current year, at $40 to $50 million of EBIT, is not yet representative of Macmahon’s full potential. The following year’s EBIT, with a full run-rate of contracts, should be closer to $85 million. If management can deliver numbers like that, the implied price/earnings ratio of about 7 times will start looking very cheap.

Macmahon is still a large shareholding for Forager, though we ceased to be a substantial holder last week. At close to 11% of our Australian fund, the position was getting too big and we have chosen to reduce it to a more manageable weighting. There are plenty of reasons to be optimistic, but risks remain. Macmahon will need to show good contract execution from here to deliver on its full potential.

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Michael Whelan

For fear of possibly giving away my age, Macmahon has had quite a few 'near death' experiences over the years, or in fact, decades. The people at CIMIC probably knew and recalled that.