Austal Limited shares sink on US problems

The share price of global defence prime contractor Austal Limited (ASX: ASB) has sunk up to 40% today after the shipbuilder announced that it was experiencing unexpected issues with its Littoral Combat Ship (LCS) 6 building project.

The company is contracted to build multiple LCS class ships in parallel and released a euphemism packed ASX announcement today to explain why US shipbuilding earnings were now expected to be lower than in the previous financial year.

The company is blaming the “schedule” and margin “pressures” as the “LCS Progam is maturing more slowly than we had expected.” This sounds like management talk for delays as the LCS building program fails to go to plan.

Further management went on to say: “Austal’s ability to apply lessons learnt and productivity enhancements from LCS 6 to vessels in advanced construction, namely LCS 8 and 10, has been more limited than anticipated”. Again this sounds like management talk for costs running over budget and it all adds up to a predicted earnings margin now expected to be in the range of 4.5% to 6.5% for the current year at the US shipbuilding projects.

The earnings margin is a reasonably large range and again suggests the company is unsure as to the full consequences of the current “schedule pressures” and failure to “apply lessons learnt in productivity enhancements”. The range could be considered wide as the revenues for the ship construction should all be known up front.

According to Thomson Consensus estimates earnings per share are likely to be 14 cents in 2016, which would place the shipbuilder on 12x earnings when selling for $1.64 today. However, those estimates are probably not adjusted for today’s news and investors should expect the stock to remain volatile, while management looks to fix its schedule pressures.


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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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