Why the Austal Limited share price surged today

Credit: Naval Surface Warriors

Shares in shipbuilder Austal Limited (ASX: ASB) climbed 2 cents or 1.7% to $1.22 today after the company announced it has won two new civil shipbuilding contracts worth $30 million.

One contract worth $16 million is to build a commercial passenger ferry for a South Korean transport business, while the second contract is to build two catamaran-style ferries for a Philippine ferry operator.

The stock hit a high of $2.56 in December 2015 as the company surfed a wave of investor excitement over its potential to make big profits as a shipbuilder for the US navy. As a beneficiary of the eye-wateringly huge US government defence-spending budget the company was a market darling until it updated the market in December that its US shipbuilding program was suffering delays and margin compression due to unexpected problems.

Subsequently the stock lost half its value although the company continues to deepen its global footprint as a defence and civilian contractor to governments and companies worldwide.

According to The Financial Times analysts have a median price target of $1.76 on the stock and I expect it may lift further tomorrow as analysts adjust their price targets to account for the new contract wins announced today.

The shipbuilder is also a beneficiary of the falling Australian dollar, offers a handy dividend, and trades on a reasonable valuation after a mixed financial year 2016. Forward-looking investors may want to keep it on their watch list for further research.

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

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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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