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Why now is a good time to buy ASX defence shares

piggy bank next to miniature army tank
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As geopolitical tensions rise among global powerhouses, there has never been a better time to invest in ASX defence shares. And demand is increasing for breakthrough technologies and specialist equipment from Australian defence contractors.

Here’s why I believe these 4 ASX defence shares are undervalued and their share price could shoot higher in the coming years.

Austal Limited (ASX: ASB)

The shipbuilding giant designs and manufactures high performance vessels for commercial and defence customers worldwide. Most notably, Austal builds and services warships for the Australian Royal Navy and the United States Navy.

Early this month, the Australian shipbuilder delivered its expeditionary fast transport, USNS Newport to the US Navy. This brings the total number of ships built for the US Navy to 24, including 3 combat ships this year.

The Austal share price has sunk almost 16% after reporting its strong full-year results for 2020. The company has an order book of $4.3 billion to be fulfilled with 10 new ships to be built. As maritime relations become frosty between nations, I think the $3.16 Austal share price could be seen as a bargain in a few years.

Electro Optic Systems Hldg Ltd (ASX: EOS)

Electro Optic Systems is Australia’s largest aerospace entity. It’s also the largest defence exporter in the Southern Hemisphere, focusing on defence, space, and communications technology. Key applications include telescopes and dome enclosures, laser satellite tracking systems and fire control systems.

The defence company recently reported that it had resumed delivery of a major overseas contract worth $150 million. Electro Optic noted this was a key step in restoring cash flow that was disrupted by COVID-19.

The Electro Optic share price has misfired since reporting its FY20 results in late August, falling 17% to $5.13. As international borders start to reopen, the defence contractor is working towards clearing its $610 million worth of backlog products. In my opinion, this in-turn could lead the Electro Optic share price to dramatically rise.

DroneShield Ltd (ASX: DRO)

A leader in drone security technology, DroneShield designs and develops detection systems to protect people, organisations and critical infrastructure from drones.

The DroneShield share price has been making tailwinds in the past month thanks to a raft of positive announcements. Last week, the company secured funding from the US Defence Department to develop its DroneSheild Complete Command-and-Control (C2) system. The worldwide leader in drone security technology also received an order from a major Southeast Asian country.

The DroneShield share price is up 56% in the last 4 weeks from Friday’s market close of 20.5 cents. With a market capitalisation of $79 million, the company should reward shareholders if it can secure meaningful contracts in the future.

Orbital Corporation Ltd (ASX: OEC)

Advanced aerospace manufacturer, Orbital provides integrated engine systems for tactical unmanned aerial vehicles (UAV). Its tier 1 client base includes Insitu (a Boeing company), Northrop Grumman, Textron Systems and a large Singapore defence company.

Engine development works are under way as Orbital seeks to build a hybrid propulsion system for the next generation of vertical take-off and landing UAVs. The company hopes to improve earnings and profitability on the sale of its flight critical components under the Insitu long-term agreement. In addition, Orbital is targeting new customer contracts and involvement in defence UAV programs.

The Orbital share price has dropped more than 35% from its 52-week high to $1.05. The underlying importance of drone technology could be a major benefactor to Orbital’s bottom line. In light of this, I believe the Orbital share price is great value.

Where to invest $1,000 right now

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Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Aaron Teboneras owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Austal Limited, Electro Optic Systems Holdings Limited, and Orbital Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. 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 Scott Phillips.

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Aaron Teboneras