The US Navy has awarded a contract to Austal to construct two additional ‘Independence class’ littoral combat ships (LCS). As was the case in 2017, the contract was awarded through a limited competition process between Austal and US-based Lockheed Martin (LMT), with Austal to build two vessels and LMT to build one vessel. Construction of LCS-32 is scheduled to begin in 2019 and delivery of LCS-34 scheduled for delivery to the US Navy in mid-FY23.
The exact amount of the contract award has not been disclosed, as the information is considered source-selection-sensitive information given Austal and LMT are, in effect, in a competitive tender process. However, the LCS program faces congressional spending caps, with each vessel to cost less than US$584m, which gives some indication of the value of the contract award.
The LCS program has faced numerous critics since its inception and has been targeted by both sides of politics at various stages over the years. Originally, the program was to see 55 LCS vessels built for the US Navy, although this target number was later reduced to 52 vessels. In July 2017, the program was further adjusted with the US government looking to build only 32 LCS vessels – 17 contracts have been awarded to Austal and 15 to LMT – with the remaining 20 vessels to be adjusted to a new guided-missile Frigate FFG(x) format. US Congress has already indicated that contracts for a further three LCS vessels will be awarded in 2019.
With the US Navy intending to purchase the first vessel under the new format in 2020, five vessel designs were chosen to compete for the contract using existing ship designs, but modified to meet the new operational requirements.
Austal’s ship construction efficiency has improved meaningfully as the company has moved through the program, with LCS-18 taking just 794 days from keel laying to delivery, versus 1,427 days on average for LCS-2, LCS-4 and LCS-6. For LMT, by comparison, the latest three ships delivered to the US Navy – LCS-9, LCS-11 and LCS-13 – have taken on average 1,495 days to construct.
We maintain our Accumulate recommendation on Austal with a $2.10 target price.