Stock of the day: Austal Limited

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This video was created on 16 September for IG audiences by ausbiz.

Stock of the day: Austal

ASX code: ASB

Major contract win leads to financial uplift

Austal, a prominent defence contractor, has won a $670 million contract from American General Dynamics Electric Boat Group. This deal underscores Austal's strong presence in the defence sector and is poised to significantly enhance its production capabilities.

Following this new contract, Austal is set to expand its production capacity in the US at its Mobile, Alabama site. The expansion includes a new shipbuilding components facility, slated for completion by 2026. This facility will help achieve the US Navy's ambitious goal of constructing two new submarines each year.

The announcement led to a 7.5% surge in Austal's share price, reflecting the market's positive reaction to the company’s expanding influence in US defence logistics.

Historical context

Starting in Perth, Austal has evolved from building multi-hull aluminium and steel ferries to becoming a significant player in defence contracting. The company’s US facilities have been pivotal in aligning closely with defence spending patterns, particularly highlighted by its recent contract wins.

Pipeline of projects and profitability concerns

Austal currently boasts a promising project pipeline valued at approximately $12.6 billion. These projects are crucial not only for revenue but also for reinforcing the company's strategic position in global defence supply chains.

Despite the positive outlook, Austal faces challenges in delivering these large-scale projects profitably. The company has historically struggled with profitability, but the latest contract is seen as a positive development towards stabilising its financial standing.

Global presence and future prospects

Austal has delivered 350 vessels across 59 countries and is poised to benefit significantly from the AUKUS agreement. With ongoing negotiations to become the shipbuilder of choice for Australia, Austal’s strategic importance continues to ascend.

The market remains cautiously optimistic about Austal's ability to capitalise on increased global defence spending while maintaining profitability. With a current price-to-earnings (P/E) ratio of 55 times, and a turnaround from previous financial losses, the company is focused on enhancing profitability through strategic investments and efficient project delivery.