US Navy Contract Makes Austal A Preferred Pick

Array
(
    [0] => Array
        (
            [0] => ((ASB))
        )

    [1] => Array
        (
            [0] => ASB
        )

)

This story features AUSTAL LIMITED.
For more info SHARE ANALYSIS: ASB
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

A growing order book is a good achievement for a company in the current trading environment and that is exactly what ship builder Austal ((ASB)) is delivering to its shareholders, the company yesterday announcing it had been awarded a second Littoral Combat Ship contract from the US Navy.

According to Macquarie, there remains scope for the company to win additional contracts in coming years that would likely take the company through to 2015 in terms of earnings given a total of ten ships are likely, though this will only be apparent over time as the US Navy is restricted to just ordering one single ship at a time.

Macquarie expects further contracts may be announced later this year, but even if this is not the case on the broker’s numbers the company already has all its forecast of $240 million in revenue from the Australian operations in hand. Total work in hand has climbed to $840 million for FY10 and beyond.

RBS Australia agrees the contract is significant, taking the view the second ship order improves both medium-term earnings visibility and increases investor comfort with respect to the future of the US defence program and what that will mean for contracts for the company.

Factoring in some other contract wins as well leads the broker to suggest earnings are likely to move higher in FY10 and FY11 in particular, the other plus in its view being the company’s deals with the US Defence Department suggest additional growth options even in a period when fiscal pressures are putting deal flow rates under pressure elsewhere in the company’s markets.

To reflect the recent contract wins RBS Australia is forecasting earnings per share of 15.6c this year, 23.5c in FY10 and 29c in FY11, while UBS expects EPS of 18c, 26c and 29c respectively. Macquarie is at 14.1c, 19c and 28.2c for each year.

Both UBS and RBS rate the stock as a Buy, while Macquarie matches that recommendation and includes the stock as one of its preferred picks in the Australian share market at present. Overall, the FNArena database shows the company is rated as Buy three times and Accumulate Once, with an average price target of $2.75, up from $2.47 on the back of RBS Australia lifting its target to $3.40 from $2.55.

Shares in Austal today are slightly weaker and at 12.10pm the stock was down 6c at $2.59. Over the past 12 months the stock has traded between $1.38 and $3.48.

Click to view our Glossary of Financial Terms