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Austal Limited shares sink on profit warning

Credit: Naval Surface Warriors

It’s another day in the red for shareholders of boat builder Austal Limited (ASX: ASB), after the company released a disappointing earnings update to the market.

A quick re-cap

Up until early December 2015, shares in Austal were flying with the stock hitting a high of $2.56.

Then investor concerns led to a plunge in the share price over the next month to a low of just 94 cents by mid-January 2016.

From that low the share price then rallied over 50% to a near term high in late April of about $1.60.

This morning the share price is back down to under $1.10.

What’s happened?

Austal has today announced that the preliminary results from “physical shock trials” to the Litoral Combat Ship (LCS) 6 have resulted in a significantly higher level of modification to the ship design and cost than previously estimated.

In short, this modification has led to the group taking a US$115 million one-off write back against work in progress to recognise an increase in the cost of construction.

As a result, statutory earnings before interest and tax (EBIT) for the 2016 financial year (FY) are forecast to be a loss of between $116 million and $121 million.

Now What

The good news for shareholders is that Austal’s board plans to declare a final dividend of 2 cents per share (cps), bringing the total dividend for the year to 4 cps.

Meanwhile, an EBIT guidance range for FY 2017 has been given of between $45 million and $55 million.

Based on today’s guidance, Austal’s shares could be cheap and no doubt some value investors are sniffing around wondering if there is a bargain on sale.

For conservative investors however, Austal’s shares may simply be too volatile and too risky. A more appropriate investment for risk averse investors could arguably be a diversified blue chip such as Wesfarmers Ltd (ASX: WES), or a listed investment company such as Australian Foundation Investment Co.Ltd. (ASX: AFI). They provide a broader exposure to the economy and no contract risk to a single business operation.

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