'Clearly a disappointing financial result': Why ASX 300 stock Austal just crashed 20%

This ASX 300 stock has sunk deep into the abyss on Wednesday. But why?

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The Austal Ltd (ASX: ASB) share price is having a day to forget on Wednesday.

The ASX 300 stock crashed as much as 22% to $2.01 in morning trade after returning from a trading halt.

The shipbuilder's shares have recovered a touch since then but remain down 11% to $2.20.

Why is the ASX 300 stock sinking?

Austal shares have taken a hit today after the company released an update on its earnings guidance.

According to the release, the company's US Towing, Salvage and Rescue Ship (T-ATS) program has been facing issues and has driven a substantial revision in its earnings guidance for FY 2023.

The ASX 300 stock notes that the T-ATS program has encountered changes in specification and general cost inflation pressures. In addition, the efficiency assumptions for the newly commissioned steel manufacturing line did not meet forecasts and have been subsequently revised.

And while these efficiency issues are expected to increasingly improve as Austal progresses construction of the T-ATS vessels, they are slowing progress on the first vessels in production.

Making things worse, the exercise of the option to construct the fifth and final vessel in the contract has also added in the associated cost issues to the onerous contract.

Austal USA has submitted requests for equitable adjustment (REAs) to seek recoveries for some of the additional costs incurred in the T-ATS project. However, the precise timing and success of those claims is uncertain. Any successful REA would benefit Austal's FY2024 results.

What's the damage?

The ASX 300 stock has advised that its earnings before interest and tax (EBIT) is now expected to be in the range of zero profit to a potential loss of $10 million. This compares to its previous guidance of EBIT of $58 million.

One positive, though, is that the company's balance sheet remains healthy. Its cash balance stood at $179 million at the end of June.

Austal's CEO, Paddy Gregg, blamed the poor financial performance on the sudden uptick in inflation and the timing of the contract award. He commented:

This is clearly a disappointing financial result for Austal given the success that we have had recently winning new projects to expand our US operations. The underlying issue is that the T-ATS award was received just prior to a period of unprecedented hyperinflation; some inaccurate assumptions were made regarding the efficiency of the new steel panel line in its first project' and the project has also been subject to specification changes from the original award.

It is clear that we need to make changes to some reporting structures and processes so that Austal USA can identify and rectify these sorts of issues in a more timely manner.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Austal. The Motley Fool Australia has no position in any of the stocks mentioned. 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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