Austal has expanded its shipbuilding capacity and capabilities significantly over the past two years. In the past three months, the company has announced the award of a meaningful amount of work, which will extend its pipeline of contracted activity, particularly in the US.
Until recently, one of our concerns about Austal was the potential for a decrease in US earnings in late FY19 and FY20 as expeditionary fast transport (EPF) production came to an end and the award of littoral combat ship (LCS) vessels slowed. Over the past three months, however, Austal has seen a significant step-up in contract activity and awards, including four LCSs and two EPFs for the US Navy, a 94-metre catamaran and, potentially, two Cape Class patrol boats for the government of Trinidad and Tobago.
It is inevitable that a significant ramp-up in the pipeline of work brings a commensurate increase in operational risk. Given the significant pipeline of work over the next five years in the ferry market as the replacement cycle comes through, and the contraction in competitive shipbuilding capacity for these types of vessels, we see Austal’s position in the market as slightly better than in previous cycles.
Over the next couple of years, we expect Austal to go through a meaningful cycle of contract awards via its commercial ferry business, combined with a US business that will be operating at capacity until 2023 (based on current awards), with an improving productivity schedule and the opportunity for a growing support business. Historically, Austal’s share price has performed well on the back of contract awards and the initial recognition of earnings, likely because shipbuilding can carry long-tail liabilities, such as contract slippage and warranties, that are not often priced in by the market.
We maintain our Accumulate recommendation on Austal and recently raised our target price to $2.30 from $2.10.