Record $127 Billion Shipbuilding Orders May Offset Future Challenges

Key Takeaways

• Austal's transition to new programs and facility investments may lead to revenue uncertainty and cash flow challenges, impacting short-term net margins.
  
• Investor sentiment may be strained by a lack of dividends and financial uncertainties, affecting profitability and earnings per share.
  
• The record order book and diverse revenue streams support stable long-term growth, while successful resolution of legal matters enhances financial certainty and earnings potential.

Catalysts

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

• Austal's focus on transitioning from mature programs to new ones may lead to revenue uncertainty and operational challenges as they ramp up production and complete the design phases, which can impact future revenue growth.
  
• The ongoing investment in facilities, such as the San Diego dry dock and U.S. consolidation sheds, is affecting cash flow, potentially impacting net margins in the short term as substantial capital expenditure is required before these investments can contribute to earnings.
  
• The uncertainty around the T-ATS Requests for Equitable Adjustment (REA) and its unresolved financial implications could result in cost overruns and affect the company's capacity to invest in profitable future projects, thereby impacting earnings.
  
• Given the substantial order book and strategic shipbuilding agreements yet to be finalized, the company's financial stability is contingent on securing additional orders and managing execution risks, which may affect net margins and profitability.
  
• Austal's lack of dividend declaration due to the need for cash to fund future expansion could strain investor sentiment, affecting earnings per share (EPS) perspectives in the short term as they prioritize capital allocation for growth over shareholder returns.

Austal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Austal's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 3.7% in 3 years time.
• Analysts expect earnings to reach A$81.2 million (and earnings per share of A$0.21) by about February 2028, up from A$14.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$96.7 million in earnings, and the most bearish expecting A$62 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, down from 94.9x today. This future PE is lower than the current PE for the AU Aerospace & Defense industry at 94.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Austal Future Earnings Per Share Growth

Risks

• Austal has a record order book of $12.7 billion with significant future opportunities through the Strategic Shipbuilding Agreement, indicating potential for stable long-term revenue growth.
  
• The successful resolution of the Department of Justice matter could lead to improved financial certainty and facilitate upcoming capital expenditure, positively impacting net margins and earnings.
  
• The growth of the U.S. Support business and Advanced Technologies segment has offset declines in other areas, suggesting diverse revenue streams that may sustain profit margins.
  
• Current government contracts and programs, including future programs such as the General Purpose Frigate and submarine modules, provide a strong pipeline of work that could lead to increased revenues and earnings stability.
  
• The anticipated recovery in Australasia from the commercial and defense orders could improve financial performance in future years, impacting revenue and potentially leading to margin expansion.

Valuation

• The analysts have a consensus price target of A$3.438 for Austal based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.14, and the most bearish reporting a price target of just A$2.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.2 billion, earnings will come to A$81.2 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of A$3.9, the analyst price target of A$3.44 is 13.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.