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 MARKET REPORTS |
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Analyst report - shares
Wise-owl.com "Stock of the week": Austal Limited
August 4, 2007
Tim Morris, Wise Owl analyst
Stock: Austal Limited
Code: ASB
Recommendation: Buy
Last month’s discovery of car bombs in the centre of London has re-ignited terrorism fears in western nations. Events like this reaffirm the need for continued muscle in security and defence budgeting across the globe to combat this borderless war. One of the beneficiaries of the recent trend towards increased defence spending has been Austal Limited.
Austal Limited is an aluminium ship building company involved in the design, manufacture and distribution of high-performance vessels such as passenger and vehicle-passenger ferries, coastal combat ships, and high speed military support vessels. The company has operations in both Australia and the US. Its Australian base is booked to operate at high capacity through to the first quarter of 2008, while this extends to the end of 2009 for its US operations.
These contracts in hand suggest that Austal’s income stream to 2009 is partially secured, as their value totals $750m, compared to the $385m in revenues generated in the last financial year. 2006 also saw net profit of $40.6m, which was a 14.3% increase on its performance in the 2005 financial year.
Future growth in earnings and the share price is heavily reliant on additional contract wins, and the company appears confident in its ability to deliver, as it has been purchasing land for future expansion of its manufacturing bases. The company has the firepower to fund any additional expansions as it only modestly geared, with the debt to equity ratio at 22%.
Austal’s highest potential earner is the Littoral Combat Ship which is a high speed, highly manoeuvrable vessel able to operate in shallow waters. The US Navy will require 55 of these ships by 2020, and each vessel worth $150m in revenue to Austal. Rather than awarding the entire order in one lot, the US Navy is granting a series of smaller contracts over the next few years. The award of one or more of these contracts is the ‘blue sky’ in Austal and could deliver a significant share price re rating.
However Austal is up against its much larger US competitor Lockheed Martin as part of the tendering process. Both companies have been awarded contracts so far, however spiralling costs overruns and contract disputes have seen the US Navy recently issue a stop work order on one of the projects awarded to Lockheed Martin. In light of these tensions we feel that Austal has a greater chance of winning future contracts from the US Navy.
Risks associated with the stock include a run-up in costs such as labour and materials, especially in the Littoral Combat Ship program, which could see Austal run into the same issues as Lockheed Martin. Trading on a PE of 16, the stock is priced modest earnings gains, however the failure to do so could see the stock punished. With a significant part of earnings coming from the US, currency risks must also be considered given the higher AUD. Loosing out on contracts to competitors is another earnings risk, as is a general slowdown in the macro economy which could slow down demand for costly vessels.
However despite these risks, we favour the stock because of its strong order book and the potential upside coming from the US Navy’s planned spend over the next few years.
Wise-owl.com currently has a buy recommendation on ASB
For the full report and further wise-owl.com recommendations and strategies, please click here for your free wise-owl.com trial.
Wise-owl.com is one of Australia's leading independent stockmarket research houses. It empowers all levels of investors and traders with education, advice, actionable strategies and risk management techniques. Its investment philosophy is based on a combination of quantitative, fundamental and technical analysis that has been proven over the years to produce very consistent and powerful returns.
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