Rising US And Indo-Pacific Defense Spending Will Spur Fleet Renewal

Key Takeaways

• New US defense programs and submarine partnerships could drive much higher revenue and transformative margin growth than currently anticipated by the market.
  
• Focus on advanced green ship technologies and expanding support services positions Austal for long-term, recurring, and higher-margin global defense opportunities.
  
• Dependence on government contracts, rising input costs, ESG pressures, execution risks, and rapid technological shifts all threaten revenue stability, margins, and long-term growth prospects.

Catalysts

Engages in the design, manufacture, and support of vessels for commercial and defense customers worldwide.

• Analyst consensus expects new US programs like OPC and T-AGOS to offset LCS declines, but in reality the ramp-up in OPC could drive revenue and EBIT dollars significantly higher than anticipated, especially if follow-on vessel options are exercised and cost efficiencies materialize at scale.
  
• Analyst consensus views the General Dynamics submarine module partnership as a major growth lever, but this likely understates the transformative earnings impact-Austal could see step-changes in both revenue and margin as workforce and capacity ramp to over 1,000 employees, with the contract potentially acting as a launchpad for further high-value submarine work globally.
  
• Sustained geopolitical tensions and rising defense budgets, especially in the US and Indo-Pacific, position Austal to benefit from an expanding addressable market, implying long-term, multi-decade revenue visibility as navies seek fleet renewal and modernization at unprecedented rates.
  
• Austal's accelerated investment in advanced, green ship technologies and its demonstrated ability to deliver low-emission, large commercial vessels (e.g., the Gotland contract) could unlock new, higher-margin export and defense opportunities as global demand for sustainable naval solutions intensifies.
  
• Underappreciated margin expansion can come from the growing support/through-life services segment, with US support EBIT margins already in the high teens/20% range and the Australasian business poised to follow, setting the company up for increases in recurring, high-margin earnings that are not fully reflected in current expectations.

Austal Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Austal compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Austal's revenue will grow by 16.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.8% today to 5.7% in 3 years time.
• The bullish analysts expect earnings to reach A$142.7 million (and earnings per share of A$0.37) by about July 2028, up from A$28.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, down from 92.6x today. This future PE is lower than the current PE for the AU Aerospace & Defense industry at 30.7x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Austal Future Earnings Per Share Growth

Risks

• Austal's heavy reliance on long-term naval contracts primarily from the US and Australian governments exposes it to revenue concentration risk; any reduction, delay, or cancellation in these government defense budgets, especially given the trend toward reducing defense spending in Western nations or political changes, could cause significant declines in revenue and earnings.
  
• The company admits that tariffs or material sourcing restrictions could increase its input costs; with a long-term secular shift toward deglobalization and onshoring, this elevated cost and supply chain rigidity may erode net margins and operating profits over the next decade.
  
• Escalating environmental, social, and governance (ESG) scrutiny brings the risk of capital access or investor appetite declining due to the shipbuilding industry's environmental impact as well as the involvement in defense-this could increase financing costs and constrain future investments, putting long-term earnings growth at risk.
  
• Austal has acknowledged lingering execution risks-recent "onerous" contracts, unresolved cost overruns, and complex new ship programs like T-AGOS suggest persistent threats of project delays or margin pressure, which could compress net margins and damage the company's reputation and future contract wins.
  
• Rapid advances in autonomous vessels, green shipping technologies, and competitive pressure from larger, technologically sophisticated peers or emerging Asian players could make Austal's current offerings less relevant unless they invest heavily and quickly, threatening revenue growth and sustained profitability if technological catch-up lags.

Valuation

• The assumed bullish price target for Austal is A$6.1, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Austal's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.1, and the most bearish reporting a price target of just A$4.2.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$2.5 billion, earnings will come to A$142.7 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of A$6.17, the bullish analyst price target of A$6.1 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.