Shipbuilding Agreement In Australia Will Open $20 Billion Opportunities

Key Takeaways

• Austal's strategic shift to new U.S. programs and facilities promises robust future revenue and strong cash flow.
  
• Strategic shipbuilding agreements and expansion in Australasia are poised for significant long-term growth and improved financial stability.
  
• Heavy reliance on U.S. government contracts, large capital projects, and complex programs exposes Austal to significant political, financial, and operational risks affecting profitability.

Catalysts

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

• Austal's strategic shift to new programs like OPC and T-AGOS in the U.S. is expected to replace and surpass the declining LCS revenue, suggesting strong future revenue streams.
  
• The expected growth in Austal's submarine module manufacturing facility and its partnership with General Dynamics Electric Boat are anticipated to generate significant additional revenue and contribute to healthy cash flow.
  
• The Strategic Shipbuilding Agreement in Australia could open opportunities worth $20 billion over 20 years, indicating long-term revenue growth and improved financial stability.
  
• The commissioning of the new floating dock in San Diego and the upgrade of the Alabama facility are poised to increase revenue and maintain high EBIT margins in the U.S. support segment.
  
• Australasian operations, aided by increased orders and new defense programs, are projected to increase their contribution to group revenue significantly, potentially improving overall net margins due to economies of scale.

Austal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Austal's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.3% in 3 years time.
• Analysts expect earnings to reach A$74.8 million (and earnings per share of A$0.19) by about April 2028, up from A$28.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$94.7 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 28.5x on those 2028 earnings, down from 65.8x today. This future PE is greater than the current PE for the AU Aerospace & Defense industry at 17.1x.
• 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 6.31%, as per the Simply Wall St company report.

Austal Future Earnings Per Share Growth

Risks

• The reliance on U.S. government contracts exposes Austal to political and fiscal risks, particularly changes in defense policy or budget cuts, which could significantly impact revenue and profitability.
  
• The large capital expenditure of approximately $750 million for facility expansions, funded partially by external support, presents a financial risk if revenue or cash flow projections do not materialize as expected, potentially affecting net margins and earnings.
  
• Delays or challenges in executing large, complex contracts such as T-AGOS or OPC, especially if compounded by design and manufacturing risks, could impact revenues and increase project costs, negatively affecting net margins.
  
• The ongoing issues with the T-ATS program and dependence on the resolution of the REA with the Navy could pose both cash flow and profitability risks if negotiations do not favor Austal.
  
• The competitive environment in global shipbuilding and potential tariff implications on materials could increase costs, impacting margins and, consequently, overall earnings if Austal cannot pass these on to customers.

Valuation

• The analysts have a consensus price target of A$4.278 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$4.75, and the most bearish reporting a price target of just A$3.9.
• 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$74.8 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of A$4.44, the analyst price target of A$4.28 is 3.8% 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.