Is it time to buy Austal Limited shares?

Credit: Naval Surface Warriors

Shares in shipbuilder Austal Limited (ASX: ASB) have added around 8% by mid-afternoon on Tuesday to $1.25 after the group released its interim financial results.

After the stock plummeted in in early December following an announcement from Austal that it “was experiencing schedule and margin pressure on Littoral Combat Ship (LCS) 6”, investors have been eagerly awaiting more news from the company.

Here’s what Austal announced

Subsequent to the update from Austal in early December the share price slumped from over $2 to a low of 98 cents. Here’s why the share price is rallying today.

  • Revenue up from $680 million to $747 million thanks largely to positive exchange rate movements
  • Earnings before interest and tax down from $33.7 million to $29 million
  • Net profit after tax down from $21 million to $16.8 million
  • Diluted earnings per share equated to 4.7 cents per share (cps)
  • Net cash position of $30.6 million
  • Fully franked dividend doubled to 2 cps. The shares will trade ex-dividend on March 8; payment date March 29
  • Order book valued at $2.8 billion

What now?

While investors have certainly found the growing order pipeline of ship-building opportunities an appealing reason to back Austal in the past, its exposure to US dollar revenues and the tailwind that has provided in a weakening Australian dollar environment has also been appealing to many.

With the effects of the exchange rate shift starting to wash through not just Austal’s results but also numerous other companies including Macquarie Group Ltd (ASX: MQG) and Amcor Limited (ASX: AMC) investors will once again be focussing on the future prospects of the company not the near term exchange rate tailwind.

Despite the 25% rally in the share price, the stock remains a long way from recent highs. There is certainly a case for the stock to trade higher, however, investors will need to be comfortable with the longer-term outlook for the group post the current contracted revenues and also with regards to achievable earnings margins.

In this regard the outlook remains somewhat uncertain with no definitive guidance provided by the company. Austal did note that the group’s strategic initiatives on securing further contracts, strengthening the business through cost improvement, and maintaining modest dividends remains unchanged. However, it is up to investors to determine what this all means for the bottom line.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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