Behind The Rally in ASX Defence Stocks

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This story features ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: EOS
The company is included in ASX300 and ALL-ORDS

A rising global spend on defence and recent contract wins have spurred growing investor interest in ASX-listed defence beneficiaries.

-Rising global military spend and contracts propel defence stocks higher
-ASX-beneficiaries include Austal, DroneShield, Electro Optic Systems and AML3D
-Flurry of contract wins trigger rising forecasts and valuations, with optimism for more
-Electro Optic Systems lands “company-maker” deal, Ord Minnett declares

By Mark Woodruff

In recent times, the defence industry has proved to be the best form of attack on the ASX. Following a series of announcements, a cohort of defence-related stocks, Electro Optic Systems ((EOS)), DroneShield ((DRO)), and Austal ((ASB)), have experienced share price surges of 250%, 217% and 35%, respectively, since the beginning of May.

Shares in AML3D ((AL3)), a relative minnow in the space with a market capitalisation of just $139m, gained 50% over the same period. DroneShield, Austal, and Electro Optic Systems currently command respective market capitalisations of $3.3bn, $2.69bn and $570m.

Offshore listed peers of DroneShield in the drone and counter-drone sectors have experienced major re-ratings following an increase in global defence spending and improvements in technology.

Domestically this is evident from the share price of Electro Optic Systems, while shares in Nasdaq-listed AeroVironment (AVAV) and Kratos (KTOS) have equally rallied strongly.

Austal

Two days ago, global shipbuilder and defence prime contractor Austal announced the finalisation of its Strategic Shipbuilding Agreement (SSA) to become the Commonwealth of Australia’s strategic shipbuilder for Tier 2 surface combatants at Henderson in Western Australia.

Austal designs, builds, and maintains commercial ferries and naval vessels, with major shipyards in Australia, the US, the Philippines, and Vietnam. The company is best known for its aluminium-hulled warships, including littoral combat ships and expeditionary fast transports for the US Navy, as well as high-speed passenger ferries.

Petra Capital explains the Austal share price continues to benefit from favourable sector dynamics such as increasing defence budgets and a strong market position. The latter is underpinned by a robust book-to-bill ratio, which means Austal consistently wins new orders at a rate that sustains or exceeds its current revenue.

This broker also highlights the prospect of earnings upside from the pending upcoming Review of Existing Arrangements (REA) for the US Navy’s Towing, Salvage and Rescue Ship (T-ATS) program.

Takeover interest from Hanwha has provided further support. In June, Hanwha (with a 9.9% stake in Austal) received approval from the US Committee on Foreign Investment (CFIUS) to potentially acquire up to 100% of the company, clearing a key national security hurdle.

Management at Austal questioned this claim and sought formal confirmation, while also expressing concern further ownership by Hanwha could conflict with Australia’s defence policy and desire to maintain sovereign shipbuilding capability.

After an extended period since the initial SSA agreement, the finalisation is a distinct positive, suggests Macquarie, given the Medium/Heavy landing crafts will underpin Austal’s Australasian operations with a consistent and high throughput level compared to historical levels.

Under this agreement, a new subsidiary, Austal Defence Australia, will become the prime contractor for the build and delivery for the LAND8710 programs. These involve Landing Craft – Medium (expected to be 18 vehicles) and Landing Craft – Heavy for 8 vessels.

At the same time, management upgraded FY25 EBIT guidance to at least $100m, up from the prior minimum of $80m, largely reflecting finalisation of accounting treatment for the submarine modules contract announced in September last year.

Citi was surprised by the magnitude of the guidance upgrade, which appears to be driven primarily by a stronger operational performance. Around 25% of the upgrade is attributed to the finalisation of accounting treatment for the US$450m contract awarded by General Dynamics Electric Boat in September 2024.

These dual announcements bolster the broker’s confidence in Austal’s medium-term earnings trajectory, underpinned by planned increases in defence spending in both the US and Australia and reduced execution risk on the T-ATS program following the successful launch of the first vessel in June 2025.

Electro Optic Systems

Bell Potter highlights Electro Optic Systems as a key beneficiary of powerful structural tailwinds across the defence and space sectors.

These tailwinds include escalating geopolitical tensions driving a global re-armament cycle, unprecedented levels of defence spending, surging capital investment into the space economy, and an increasing urgency to protect critical space-based infrastructure.

Designing and manufacturing advanced weapon systems as well as space systems, Electro Optic Systems is best known for its remote weapon stations, which are highly precise, mountable weapon turrets for armoured vehicles. The company also develops high-energy laser systems and space surveillance technologies.

In a deal announced this week and described by Ord Minnett as a “company-maker”, management secured a $125m contract from an unnamed European NATO member for delivery of a 100kw High Energy Laser Weapon (HELW) counter-drone system, marking the world’s first export order of its kind.

The analysts at Canaccord Genuity emphasise the substantial price tag applies to a single unit, underscoring the system’s high value. Commercialisation is expected to attract interest from other allied nations, likely prompting further product demonstrations and validation.

Presenting potential investors with a new angle to gain leverage to the emerging drone warfare thematic, highlights Bell Potter, this capability was developed to address the urgent market need and emerging strategic requirement to defend against drone swarm attacks at an economical cost.

The contract, to be fulfilled by Electro Optic Systems Singapore between 2025 and 2028, positions the company with first-mover advantage in a potential non-US market worth over US$10bn across 200 units.

Ord Minnett’s forecasts assume the company could capture $1.3bn in additional orders by FY32.

DroneShield

DroneShield specialises in counter-drone and electronic warfare solutions. Its AI-driven platforms detect and neutralise drones and autonomous systems, serving military, intelligence, government, critical infrastructure and other clients across land, sea, and air.

Last month, management committed to invest -$13m in a significant R&D and manufacturing capacity expansion at a new production facility in Sydney’s Alexandria. This is in addition to a similar sized R&D area at the company’s headquarters in Pyrmont (also in Sydney).

Management is targeting a $2.34bn (and rapidly growing) global pipeline including in Europe, its fastest-growing export market.

Later in the same month, the company was also awarded a $5m contract under Project LAND156 to supply handheld counter-drone equipment to the Australian Defence Force to help identify and mitigate unmanned aerial threats.

DroneShield has secured a flurry of diverse contract wins in recent weeks. Since unveiling a $61m contract on June 25, the company has followed up with a $9.7m order from a Latin American client, along with a two-year, $11.7m R&D engagement awarded by an unspecified Department of Defence from the Five Eyes alliance.

On Bell Potter’s recent estimate, DroneShield holds around $175m in contracted revenue scheduled for delivery in calendar 2025.

AML3D

Management at AML3D (which specialises in metal additive manufacturing) has also been busy. In June, the company announced the opening of its new US Technology Facility in Ohio, and in the last two weeks has appointed a UK and European distributor, along with a second non-exclusive European distribution partner.

Bell Potter explains this latest partnership with German additive manufacturing technology provider DMFG Solutions GmbH aims to accelerate the company’s access to the European defence and manufacturing markets.

Designing and manufacturing its own Arcemy 3D printing systems, AML3D provides contract manufacturing services to clients in industries such as marine, aerospace, defence, and resources.

Arcemy refers specifically to a series of turnkey, large-scale Wire Additive Manufacturing printers that combine welding, robotics, and automated software to produce metal components (like ship components or aircraft tooling) on demand more cost-effectively than traditional casting or forging methods.

Shaw and Partners highlights the Big Beautiful Bill Act in the US sets aside US$400m for wire feed additive capacity and US$500m for broader advanced manufacturing in the maritime sector.

The analyst expects AML3D to be contract ready by 2026 to secure its share in line with US Navy spending.

Outlook

While remaining cautious in early-June on Austal’s valuation, Bell Potter noted potential for rising passive flows from potential ASX200 inclusion and further material contract awards linked to the SSA with the Australian government.

Elsewhere, the broker remained bullish on the structural growth outlook for the sector and considers DroneShield to be a clear market leader.

There are three daily monitored brokers in the FNArena database conducting research on Austal, all with Hold or equivalent ratings. Macquarie, Citi, and Bell Potter (latest research back in early-June) have respective targets of $7.05, $7.00, and $5.60, which compare to the $7.20 share price at the close of trade on August 7.

Outside of daily coverage, Petra Capital is also on Hold with a $6.67 target.

For DroneShield, both Shaw and Partners and Bell Potter upgraded to Buy from Hold on July 31, following improving cash flows evident in management’s June quarter update. Their average target price is $3.70, implying around -10% downside to the $4.09 closing share price.

Electro Optic Systems (last traded at $4.90) has Buy ratings from Ord Minnett and Bell Potter with targets of $4.25 and $5.00, respectively. Outside daily monitoring, Buy-rated Canaccord Genuity has a $4.30 target.

Shaw is a Buy on AML3D and Bell Potter a Speculative Buy. Both have targets of 40c, well above the latest 28c share price.

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