COSOL helps asset-heavy industries — mines, ports, utilities — manage their physical infrastructure through specialist IT consulting and managed services built around IBM's Maximo platform. At A$0.30 against our fair value of A$0.50, the stock is undervalued by 67%. The key question is timing: margin recovery depends almost entirely on whether the first-half revenue collapse was a cyclical disruption or the beginning of a structural decline in coal-sector IT spending.

COSOL is best suited to patient value investors comfortable holding through a recovery cycle of 18 to 24 months. The discount to fair value is meaningful, but it comes with genuine execution risk, a leveraged balance sheet, and a management team that has consistently guided too optimistically. This is a stock for a small satellite allocation, not a core holding.

COSOL is a specialist IT services firm that helps asset-intensive organisations — mining companies, ports, utilities, and government agencies — manage their physical infrastructure using IBM's Maximo and Ellipse platforms. It earns revenue through three channels: project consulting in Australia, a managed services division serving the mining sector, and a fast-growing Americas business targeting US infrastructure operators.

The first half of FY26 was painful. Revenue fell to A$49.6m, down 14% on the prior period, as two major consulting contracts lapsed and thermal coal operators scaled back IT spending. EBITDA margin compressed from 14.4% to 7.1%. The company suspended its dividend and the share price halved from its 12-month highs.

The investment case rests on a single judgement: is this a cyclical trough or a structural break? We assess it as roughly 64% cyclical. The cost base has been restructured, saving A$1m annually. The Americas division is growing at 15% operating margins on signed multi-year contracts. And the operating leverage in the business means that an 8% revenue recovery in FY27 should mechanically drive a doubling of EBITDA. The risk is that coal-sector headwinds prove deeper than modelled, or that the leveraged balance sheet forces a dilutive equity raise before recovery takes hold. At A$0.30 versus our fair value of A$0.50, the stock is undervalued by 67%.

What Happened

The first half of FY26 was the worst reporting period in COSOL's listed history. Two major Australian consulting contracts ended without renewal, and thermal coal operators — a core constituency of the managed services division — accelerated decommissioning programmes. Revenue fell 14% and EBITDA dropped 57%, compressing the margin from 14.4% to 7.1%. A concurrent IBM partner policy change removed approximately A$1.5m of managed services revenue at a stroke. The company responded by cutting costs, suspending the dividend, and redirecting its sales focus toward government and infrastructure clients.

What's Next

Management has guided for a stronger second half, citing a restructured sales function and a pipeline of government and infrastructure contracts. We model H2 FY26 revenue at approximately A$53m — a 7% step-up from the first half — which would deliver a full-year EBITDA of A$9.3m and keep the company within its Westpac debt covenants.

The critical event is the FY26 full-year result in August 2026. If EBITDA exceeds A$9.5m and net debt falls below 2.5 times EBITDA, the covenant overhang lifts and the recovery thesis becomes testable in earnest. The Americas division is the cleaner story: two signed multi-year managed services contracts support continued growth toward A$15m in FY27, and the US infrastructure spending cycle has years to run. Any additional contract announcements between now and June would be a meaningful positive signal. A dividend resumption is possible in FY27 but is contingent on leverage declining first.

The single biggest risk is a weaker-than-expected second half triggering a covenant breach. COSOL carries A$24.4m in bank debt against trailing EBITDA that has collapsed to annualised levels near A$7m, implying leverage approaching 3.5 times — uncomfortably close to what Westpac is likely to permit. If H2 revenue disappoints and full-year EBITDA falls below approximately A$7.5m, the company would almost certainly need to either waive covenants or raise equity. An equity raise at current prices or below — modelled in our severe scenario at A$0.20 per share — would dilute existing shareholders by roughly a third and push fair value down to A$0.09. That outcome has a 10% probability in our model, but its severity means position sizing should reflect it. The fair value of A$0.50 already embeds this risk through scenario weighting; the wider point is that the downside is not merely a smaller gain — it is a material permanent loss of capital.