Austal shares advance as new US contract impresses analysts
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The news: Austal shares advanced on the ASX as Bell Potter raised its target price on the Perth-based ship builder, after it secured a $670 million contract from General Dynamic Electric Boat (GDEB) to expand its shipyard in Mobile, Alabama on Monday.
The numbers: Austal shares were up 4.8% to $2.84 by 1:45pm AEST. On Monday they surged 17.9% after it announced that its US business had been awarded the new contract.
Bell Potter left its 'buy' rating on the stock unchanged but lifted its 12-month target price by 15% from $2.75 to $3.15.
The context: Bell Potter analyst Daniel Laing said the contract is a "major development" given submarine module fabrication provides a long-term pipeline of sustainable work, while funding from GDEB for the expansion alleviates any potential balance sheet concerns.
The deal also reiterates Austal's standing as a responsible contractor to the US Navy, Laing said, and likely removes any risk to this position changing following the conclusion of investigations by the US Department of Justice.
Meanwhile, Citi analysts called the contract a "positive surprise" and should make the stock appear "even cheaper than it already does". They said the investment could increase Australia's net tangible assets by 69%, with a high chance that it will pave the way for a long tail of submarine module work.
They flagged that a key risk remains around how effectively Austal can increase its workforce, with the new submarine building expected to provide 1,000 jobs once completed in the 2026 calendar year, on top of around 1,000 that the company will be sourcing on the back of the investment.
Citi kept its 'buy' rating on Austal with a target price of $4.14.
What they said: "We believe this is a significant development for [Austal] that will diversify its shipbuilding operations, drive long-term revenue growth and reinforce its position as a key contributor to the US naval industrial base," Laing said.
The sources: Bell Potter research, Citi research
