Duratec (ASX: DUR) is a mining, infrastructure, and defence contractor originally founded in Perth but now operating Australia-wide. I once owned shares in it because I thought it was cheap, and regrettably sold well before it started its recovery. Fast forward a few years, and the share price is much higher, the stock less obviously cheap. Crucially, however, having watched the company operate for a few years, my confidence in the quality of the business has increased over time.
As I’m sure you will have noticed, geopolitical ructions and various conflicts have led many countries to invest more in their armed forces in recent years. From time to time, it occurs to me that this trend means government spending priorities may well be shifting towards defence infrastructure. Since Duratec helps the Australian government maintain and develop critical defence infrastructure, such as naval bases, it could be well positioned to grow over the next few years.
To my mind, Duratec could one day become an official recommendation. However, while I think it is well-positioned over the medium to long term, I’m not sure I have sufficient confidence in the current valuation. Nonetheless, rather than prevaricate privately, I thought I’d share my analysis of the Duratec H1 FY 2026 results.
In H1 FY 2026, Duratec’s revenue was down almost 5%, and although gross profit was up around 5%, net profit was only up 3.5%, and once you account for dilution, earnings per share was up a piddling 1.5% to 5.25 cents per share.
Since listing in late 2020, Duratec itself has grown both organically and through acquisition. The covid lockdowns impacted the business shortly after it listed, but management navigated the company through that period and into a strong rebound. This was followed up by some acquisitions. The resultant earnings growth saw a strong share price appreciation.
In the recent H1 FY 2026 results, Duratec generated almost a quarter of its gross profit from Defence projects, as you can see below.
The interim dividend of 1.75c brings the trailing twelve months yield to 4.25 cents per share, or just 2.1%, fully franked, at a share price of $2.
Analysts expect around $28.35m net profit after tax for FY 2026, which would require about $14.9m of profit in the second half, implying very solid net profit growth of 14% on H2 FY 2025. The company hasn’t given any guidance, because its results willl depend on the success and timing of the “$0.5 billion worth of awards to come,” according to management.
Duratec’s Anticipated Contract Wins
The main point I wanted to make is that Duratec believes it is about to win a bunch of new work with the government’s HMAS Stirling Naval Base. Australia has a lot to do to prepare HMAS Stirling for nuclear submarines, and for all we know, increased conflict in the world might lead to further increases to the Australian defence budget.
I think that, on average, these foreign wars nudge Australia to spend more on defence, not less. And I don’t believe America will back out of its AUKUS agreement on submarines, although I accept that is a possibility (and a risk for Duratec).
Personally, my main hesitation with Duratec is that the analyst forecasts for FY 2026 seem to assume that these government contracts will be awarded in a timely manner. There is obviously a timing risk there. In one possible scenario, Duratec only wins the work at the end of the half, thus shifting growth out into FY 2027. In a worse scenario, Duratec simply fails to win its anticipated contract load.
I note analysts did overestimate the FY 2025 results, and so it wouldn’t be that surprising if it turned out that analysts were too optimistic about FY 2026. The reality is that Duratec’s growth is lumpy, not smooth, so it is possible that the second half will be much stronger. But there is no guarantee.
A more conservative way of rating the company might be to assume it ony makes diluted earnings per share of 10 cents per share in FY 2026 (implying lower profits in the second half). That would put it on a P/E ratio of around 21 at the current price of $2.10. You can see Duratec’s historic earnings per share in the chart below (the dotted line assumes 10c in total diluted earnings per share for the full year).
Duratec has debt of about $32m offset by cash of more than $70m. It has net assets of about $85m so its balance sheet is in reasonable shape, though not as strong as it could be. Free cash flow was weak at essentially nothing in the first half of FY 2026, “reflecting the timing of upfront project procurement to support project delivery in the second half of the year.” As a result, I’d expect the company to produce free cash flow in the second half. That’s not what I like to see, but given the capital-intensive nature of the business, one would expect free cash flow to fluctuate inversely to working capital needs in any given half.
Given its H1 FY 2026 earnings-per-share growth rate of less than 2%, you wouldn’t want to pay 21x earnings for the stock. To my mind, that means the market is already pricing in some solid growth over the next 18 months or so. And that means I don’t feel overly confident about the valuation.
On the other hand, I actually do think it is quite likely that the business will be able to grow at an increased rate in future periods. It is quite possible it could end up justifying the current price tag.
For now, Duratec shares are a bit too expensive for me to want to buy with confidence (or recommend the stock). That said, I’m strongly considering buying a small “research position” in Duratec, in order to encourage myself to follow the company more closely and get to know it better. After all, there is also a possibility that the company will win a bunch of contracts and then give bullish guidance for FY 2026 (or even FY 2027).
Overall, on a valuation basis, I can’t get comfortable with Duratec right now. But I think it is a decent-quality business (as a good-quality contractor), and there are a fair few potential tailwinds that could boost the business over the next few years. Even if the stock is fully valued right now, I think Duratec has the potential to be a significantly bigger company in just a few years, quite possibly rewarding shareholders along the way. One to watch, at the very least.
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Disclosure: The author of this article does not own shares in DUR and will not trade DUR shares for at least 48 hours following the publication of this article. This article is not intended to form the sole basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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