The Austal Limited (ASX: ASB) share price hit a fresh eight-year high this morning following news that the shipbuilder will be included in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and a bullish note from a top broker flagging potential profit upgrades for Austal.
The ASB share price inched up 0.3% to $3.17 in morning trade with the stock adding 7.5% since last Friday when S&P said be added to the top 200 stock index together with the Service Stream Limited (ASX: SSM) share price and Clinuvel Pharmaceuticals Limited (ASX: CUV) share price from this Monday.
ASX stocks that are put into a key market index tend to outperform but Austal may be getting an added boost after Macquarie Group Ltd (ASX: MQG) pointed out that its earnings could turn out to be better than expected as the Australian-listed company appears to be in a good position to win work for the FFG(X) – a class of multi-mission guided-missile frigates for the United States Navy.
Sailing ahead on FFG(X)
There are press reports that key rival Lockheed Martin has bowed out of the tender process and Austal's design for the new frigate is based on its successful Littoral Combat Ship (LCS) that its currently building for the US.
"ASB is clearly outperforming Lockheed Martin on the LCS program (ASB awarded 2 of 3 vessels in FY17, FY18 & FY19) which bodes well for the upcoming decision on FFG(X)," said Macquarie.
"LCS order book to ~2025 provides medium-LT earnings visibility. If the FFG(X) bid is unsuccessful we see opportunity for ASB to win work on other US Navy programs."
Austal won't sink without new Frigate project
One of these programs could be an extension of the LCS project. While the US Navy said that FY19 would be the final year for procurement for these vessels, Macquarie pointed out that ordering more LCSs in FY20 would hedge against any delays in the FFG(X) program.
In any case, the number of LCSs has already exceeded the original plan and new warship projects are notorious for delays.
Further, if Austal isn't successful in the FFG(X) program, the Navy could still utilise the company's shipyard for other work, such as building destroyers or amphibious vessels. This seems likely in this political environment. If you weren't already aware, there's a new arms race underway thanks to the rise of China.
"The US Navy's FY20 30-year plan is to increase the fleet to 355 vessels, so maintaining shipbuilding capability is strategically important," said Macquarie.
"We therefore expect ASB's yard will continue to be supported through the LCS program and associated support work, the FFG(X) program, or work across other US Navy programs."
Investors will be hoping that Macquarie is right about the earnings upgrade potential. The stock's outperformance has lifted it above the $3.10 price target that the broker has put on Austal, although Macquarie continues to recommend the stock as "outperform".
