Fortress Australia: Identifying The ‘Real’ Beneficiaries Of The $330bn Defence Pipeline

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This story features DRONESHIELD LIMITED, and other companies.
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The company is included in ASX200, ASX300 and ALL-ORDS

Defence spending is on an upward trajectory, globally. Which (small cap) companies on the ASX stand to benefit?

• Australia's annual spending on defence is trending toward $100bn by 2033–34
• ASX defence sector has matured into a legitimate industrial thematic, non-correlated with consumer spending
• Multiple companies have not been immune to shareholder controversies
• Lumpiness of government procurement and margin caps on sovereign contracts remain industry characteristics

By Lily Brown

The era of the peace dividend is officially behind us. For decades, Australian investors could afford to ignore the defence sector as a niche corner of the industrials market, often characterised by lumpy contracts and speculative tech that rarely translated into bottom-line earnings.

However, as we move through 2026, the macroeconomic landscape has shifted fundamentally.

Australia’s transition to a “Strategy of Denial” is no longer just a white-paper concept; it is now backed by a staggering $330bn commitment to the Integrated Investment Program (IIP) over the next decade, with annual spending on a trajectory to hit $100bn by 2033–34.

For investors, the question is no longer whether defence spending will rise, but how that capital will translate into earnings across the listed market.

The global primes —the Lockheeds and BAEs of the world— capture the headlines as the winners of defence contracts, but they remain largely out of reach for ASX-focused portfolios.

To find the real value, one must look at the sovereign industrial capability winners. These are local companies that have successfully embedded themselves into the all-weather pipelines of sustainment and asymmetric technology.

The industrial anchor: Austal’s strategic monopoly

The narrative for Australian defence begins at the waterline. Austal ((ASB)) has undergone a fundamental re-rating in the eyes of analysts, moving from a commercial shipbuilder to a protected strategic asset.

The signing of the Strategic Shipbuilding Agreement (SSA) in late 2025 was a watershed moment, effectively granting the company a long-term monopoly on large-vessel construction at the Henderson shipyard in Western Australia.

This structural shift is finally showing up in the financial plumbing. In its results released in February 2026, Austal reported a 34.4% surge in revenue to $1.1bn, but more importantly, a 41.3% increase in EBIT.

With a record order book of $17.7bn and a dominant position in the $1.029bn Landing Craft Medium (LCM) program, Austal has transitioned into a sustainment king.

The company has 64 vessels currently under sustainment contracts, providing a high-margin, recurring revenue base that buffers the volatility of new-build cycles.

Despite the growth, Austal’s stock recently fell -10.95% following the earnings call as management admitted to forecasting errors on US contracts. Some US contractual incentives had been booked twice.

Austal said the overstatement was about US$17.1m and that it had been included in FY26 EBIT guidance, so FY26 EBIT guidance was cut to about A$110m. The earlier official guidance cited A$135m for FY26 EBIT.

The latest mishap follows on from a much more serious case whereby Austal USA had artificially reduced cost estimates in order to compete for new shipbuilding projects, effectively overstating the company’s profitability on projects.

That case was settled with the DOJ in the US, including a -US$24m penalty in 2024.

In addition, as a sovereign monopoly, Austal risks becoming a regulated utility, where the government caps profit upside in exchange for de-risking the business.

This leaves investors with bond-like earnings certainty but reduced exposure to outsized equity returns.

Asymmetric growth: The DroneShield pivot

If Austal provides the defensive floor, DroneShield ((DRO)) represents the high-velocity ceiling. The conflict in Ukraine has served as a global laboratory for the effectiveness of cheap, autonomous drones, turning counter-UAS (Unmanned Aerial Systems) technology into a mandatory requirement for modern militaries.

DroneShield’s FY25 results confirmed the company has moved past its speculative phase. Revenue surged 276% year-on-year to $216.5m, while a statutory net profit of $3.5m signalled a definitive return to profitability.

However, the real data point for the quality-focused investor is the Software as a Service (SaaS) momentum. SaaS revenue now accounts for over 27% of locked-in 2026 revenue, offering the kind of recurring, high-margin visibility that typically commands a premium valuation.

With a sales pipeline of $2.3bn, DroneShield is arguably the purest play on the Ukraine lesson available on the local exchange.

Despite the many positives, the “war premium” is real. With a price-to-sales (P/S) ratio of 14.3x (compared to a peer average of 4.4x), DroneShield is arguably already priced for perfection.

Any de-escalation in global tensions or a single quarter of flat growth could see that premium evaporate rapidly.

Similar to Austal, Droneshield has not been immune to public debate and controversy.

The company’s governance came under scrutiny after three directors sold large parcels of shares between 6 and 12 November 2025, with ASX questioning whether the disposal of their holdings was itself price-sensitive.

The controversy intensified because some of the selling on 10 November occurred after the company announced a US$7.6m-equivalent order update, but before that statement was withdrawn later the same day when DroneShield acknowledged the contracts were not new orders but re-issued ones.

ASX also raised concerns about the company’s trading-policy compliance and the initial Appendix 3Y disclosures, which grouped the sales into a broad date range rather than listing each transaction day separately.

The episode contributed to a sharp share-price pullback and led DroneShield to tighten its governance framework, including longer blackout periods, stronger approval processes, and a formal disclosure committee.

The recovery narrative: Electro Optic Systems (EOS)

Few companies have tested investor patience as much as Electro Optic Systems, yet 2026 marks its emergence as a leaner, debt-free contender.

Following an aggressive restructuring, EOS has successfully aligned its directed energy (lasers) and remote weapon systems (RWS) with the needs of NATO and the AUKUS Pillar II framework.

The company’s FY25 Annual Report revealed a transformation of the balance sheet. By January 2025, EOS reached zero debt after fully repaying its lending facility with Washington H Soul Pattinson ((SOL)).

There had been talk of a commercial dispute between the two companies prior to that.

This financial de-risking has been met with significant commercial momentum; the unconditional order book ballooned to $459.1m, anchored by a world-first export contract for a 100kW laser weapon system to the Netherlands.

But sceptics remember the 2020–2023 period when massive backlogs failed to convert to cash.

While revenue ramp-up is expected, current valuation narratives suggest the stock may already be overvalued at its current price, assuming a 30% yearly revenue growth requirement that leaves little room for execution error.

The share price has pulled back recently and is currently trading some -24% below FNArena’s consensus price target (two brokers; Bell Potter and Ord Minnett).

This company too has had its own share of shareholder controversy recently, based on management share sales.

On 17 March, EOS disclosed chief executive Andreas Schwer had exercised options and received board approval to sell up to 2.5m shares, while chief financial officer/chief operating officer Clive Cuthell and other senior managers also flagged plans to sell some or all of their holdings.

The announcement unsettled investors because it followed a strong run in the share price and came only weeks after a short-seller attack on EOS’s US$80m Korean contract with Goldrone, which had already dented market confidence.

EOS later confirmed Schwer had sold 1.5m shares but retained 1.4m shares, which the company said remained above its minimum shareholding policy.

The picks and shovels of AUKUS

While the shipbuilders and tech-heads grab the limelight, the industrial backbone of the defence surge is found in the supply chain.

Veem Ltd ((VEE)), market cap circa $82m, recently secured a nine-year Manufacturing Licence Agreement with Northrop Grumman, a move that embeds the company directly into the US and Australian submarine supply chains.

This is a critical prerequisite for the AUKUS rollout. Similarly, Bisalloy Steel ((BIS)), market cap circa $198m, continues to benefit from the demand for specialized armour, with its 1H FY26 report showing a 7.3% rise in Australian segment revenue driven in part by the protection steel requirements of the Hunter-class frigates.

The expert verdict: Mind the gap

Despite the bullish figures, seasoned analysts warn against mistaking budgeted spending for immediate earnings.

Elizabeth Buchanan, a senior fellow at the Australian Strategic Policy Institute (ASPI), argues Australia’s defence debate is “lost in rhetoric” and has “failed to discern between the concepts of intent and capability”, highlighting a persistent gap between strategic ambition and deliverable outcomes.

Analysts highlight Australia’s integrated air and missile defence capability remains underdeveloped. As a result, the program is likely to take years to fully mature before its benefits are realised across the defence industrial base.

Beyond individual stock picking, the entire sector faces a systemic risk: labour. As the ASPI Cost of Defence report warns, the Australian Defence Force is failing to meet its personnel targets; some estimates put the shortage at 4,500.

For listed companies, this translates into intense wage inflation for specialised engineers and technicians, which may consume most of the revenue uplifts achieved within the sector in 2026.

The Bottom Line

The ASX defence sector has matured into a legitimate industrial thematic, offering a rare pocket of structural growth decoupled from the consumer cycle.

However, the lumpiness of government procurement and the reality of margin caps on sovereign contracts mean not every dollar of the $330bn pipeline will reach shareholders. 

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