Confidence Builds In Austal With US Navy Win

This story features AUSTAL LIMITED. For more info SHARE ANALYSIS: ASB

-Order ahead of expectations
-Positioned for maintenance work
-Better funding terms this time
 

By Eva Brocklehurst

Ship builder Austal ((ASB)) has scored a win with the US Navy, with the award of two LCS (littoral combat ships) ship building contracts for a value of US$691m. This award finalises the funding of a 10-ship block purchase and the US Navy has added a further option for another in 2016. A plan to extend the LCS program to 32 vessels has been flagged, with 27 already awarded, while the US Navy is reassessing an expansion program for vessels 33 to 52.

The US Navy's budget only funded three LCS this year. Macquarie had suspected Austal would be awarded one ship with long lead items for a second vessel, given its contract is running six months behind competitor Lockheed Martin's contract. Instead, Lockheed was awarded just one vessel for US$362m, with US$79m awarded for long lead items for a second. The broker notes this is the first time the US Navy has had to award an uneven number of ships and been forced to decide between the two builders.

Macquarie suspects Austal could eventually build 15% of the US Navy fleet and the 2016 option for an eleventh LCS is the first tangible sign the program is being extended. The order book now stands at $3.1bn and Austal now has work for its US facility out to 2020. The Joint High Speed Vessel (JHSV) is generating substantial interest both in the US and internationally and Macquarie suggests, should this program and the LCS vessels be extended, there could be substantial work ahead for Austal.

In Macquarie's view, the news signals a strong improvement  in Austal's balance sheet. The broker retains an Outperform rating and $1.96 target. The company's work has put it in a prime position to win service and maintenance contracts as well, and this could build into a material annuity-style business for the company over time.

JP Morgan has an Overweight rating and $1.82 target and believes the decline in the Australian dollar will underwrite the earnings profile over the medium term. This broker also observes there was some risk Austal would not receive full funding for two vessels, with the US government signalling that only three vessels would be funded. The broker cautions that no conclusion can be drawn that the US Navy prefers Austal's variant to its competitor's but Austal has received better terms in this round of funding, with a full benefit for two vessels, while Lockheed has received full funding for one vessel and part funding for the second. JP Morgan assumes the dual purchase program will proceed with both providers.
 

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