Austal Limited

Company Overview: Austal Limited (ASX: ASB) is Australia’s leading defence exporter and global shipbuilder with industry-leading shipyards in Australia, the United States of America, Philippines and Vietnam. ASB is known for designing, constructing, and sustaining some of the world’s most advanced commercial and defence vessels. The company’s commercial vessel platforms include high-speed passenger ferries and vehicle-passenger (ROPAX) ferries. The company was listed on ASX in 1998.

ASB Details

Decent Pipeline of Work to Support Future Growth: ASB continues to transform itself into an advanced maritime technology company focused on manufacturing vessels of aluminium and steel in commercial & defence sectors.  

• Track Record of Delivering Vessels: Over the last thirty years, ASB has contracted more than 340 vessels all around the world. In H1FY21, ASB delivered 10 major new vessels worldwide and since the release of the H1FY21 results, it has been awarded several contracts, including a US$235 million undefinitised contract by the United States Navy, a US$44 million contract modification of EPF13, a contract for concept studies and preliminary design for the U.S. Navy’s light amphibious warship (law) program, and a US$44 million LCS modification contract.
• Decent Future Work Opportunities: ASB is focused on pursuing future work opportunities across ships, systems, and support services. The future work opportunities include opportunities in US programmes- new build and support, Philippines offshore patrol vessels (OPV), Commonwealth of Australia Force Structure Plan.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

H1FY21 Result Highlights:

• Decline in Revenue: For H1FY21, ASB reported total revenue of A$840 million, down by 19% on the previous corresponding period (pcp), due to the negative impact of reduced throughput and foreign exchange (FX) headwinds.
• Rise in EBIT: EBIT for H1FY21 stood at A$70.5 million, up 18% on pcp, driven by lower corporate overheads, strengthening of margins in Australasia shipbuilding business, incentive award fees, funding approvals and reversal of doubtful debts all from FY2020.
• Rise in NPAT: NPAT for H1FY21 stood at A$52.4 million, up by 29% on pcp.

Key Metrics: Gross margin for H1FY21 stood at 13.9%, up from 10.5% in H1FY20. EBITDA margin for H1FY21 stood at 11%, up from 8.1% in H1FY20. Current ratio for H1FY21 stood at 2.13x, up from 1.99x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations. Cash cycle for H1FY21 stood at 23 days, down from 33.2 days in H1FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 33.36% of the total shareholding, while the top four constitute the maximum holding. Rothwell (John) and BlackRock Investment Management (Australia) Ltd. are holding a maximum stake in the company at 9.11%  and 5.44%, respectively, as also highlighted in the chart below:   

(Source: Analysis by Kalkine Group)

ASIC Regulatory Investigation Update:  Australian Securities and Investment Commission (ASIC) recently notified that it will not be taking criminal action against ASB in relation to the historical matters concerning market disclosures about ASB’s Littoral Combat Ship (LCS) program before July 2016. However, ASIC is moving ahead with civil proceedings in the Federal Court against Austal Limited for continuous disclosure breach. The next case management hearing of this matter is expected to happen on 8 October 2021.

Track Record of Paying Increasing Dividend: Over the past four consecutive years, ASB has been paying growing dividends to its shareholders, as demonstrated in the below figure. From FY16 to FY20, DPS grew at a CAGR of ~18.92%. In H1FY21, ASB paid an interim dividend of 4 cents per share, up 33%% on the pcp, supported by the increased bottom-line performance. At the CMP of A$2.19, the company’s annual dividend yield stood at 4.12%, higher than the 5-year average dividend yield of 2.48%. The company’s growing dividend is one of the investment decision points for dividend seeking investors.

Dividend Track Record (Source: Analysis By Kalkine Group)

Latest Developments:

• Awarded Maintenance and Modernisation Contract: On 5^th August 2021, ASB announced that United States Navy has awarded a Sustainment Execution Contract (SEC) to Austal USA to perform maintenance and modernisation work at West Coast- based Littoral Combat Ships. This contract has expanded the reach of Austal USA in America.
• Delivered 12th Guardian Class Patrol Boat: Austal Australia recently delivered the 12th Guardian-class Patrol Boat (GCPB) to the Australian Department of Defence, maintaining its schedule of delivering one vessel, on average, every three months.
• Delivered Future USS Savannah (LCS 28): After completing the future USS Savannah (LCS 28) in just under three years period, Austal USA has recently delivered it to the U.S. Navy. Over the last two years, Austal USA has delivered sevens ships (including Savannah) to the US Navy.
• Awarded US$44 million LCS Modification Contract : On 23^rd June 2021, ASB announced that the United States Department of Defense has awarded US$44 million LCS modification contract to Austal USA. Under the contract, Austal USA will provide LCS Class design services to all Independence-class LCS ships while maintaining Integrated Data Product Model Environment (IDPME) that will allow the Navy to access enterprise LCS data management.

Key Risks:

• Legal and Compliance Risks: The company is exposed to the risks related to the ongoing civil proceeding in the Federal Court in relation to the historical matters concerning market disclosures about ASB’s Littoral Combat Ship (LCS) program before July 2016.
• COVID-19 Uncertainties: The COVID-19 related border closures and travel restrictions could delay the company’s programs and impact its shipbuilding operations in Australia and the Philippines.

Outlook: Looking ahead, the company is focused on deploying a range of technologies to achieve new levels of vessel efficiency, availability and reliability. ASB is of the view that it has the capability to deliver steel & aluminium shipbuilding and sustainment in commercial & defence sectors. Lately, ASB has been awarded significant contracts by US Navy and US Department of Defense, reflecting its decent work order pipeline. In the coming years, ASB expects to achieve growth in Defence Support services as more vessels are to be delivered. As per the company’s updated guidance, FY21 EBIT is expected to be in the range of A$112 million to A$118 million and FY21 revenue is expected to be around A$1.55 billion.

Valuation Methodology: P/E  Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ASB is currently trading lower than the average 52-week price level band of A$1.98-A$3.81, offering a decent opportunity for accumulation. We have valued the stock using P/E multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). We believe the company can trade at a slight discount to its peers, considering the impact of COVID-19 related border closures and travel restrictions and uncertainty surrounding the ongoing civil proceeding in the Federal Court. We have taken peers like Electro Optic Systems Holdings Ltd (ASX: EOS), PTB Group Ltd (ASX: PTM) and Orbital Corporation Ltd (ASX: OEC), all belonging to Aerospace & Defense sector. Considering the company’s improving bottom-line, recently awarded contracts, track record of paying decent dividends, current trading level, valuation and the key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of A$2.19 (as on 5^th August 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia).

ASB Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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