Austal Ltd (ASX: ASB) has been one of the week's biggest movers, soaring 15% so far this week (share price was $7.37 at the time of writing), following a string of positive announcements. These included an earnings upgrade and a major new defence deal with the Australian government.
Investors clearly liked what they saw, but with the share price now bumping up against analyst price targets, it raises the next logical question: Is it still a buy at current levels?
Macquarie's latest research note gives us some clues.
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What triggered the rally?
On Monday, Austal upgraded its FY25 EBIT guidance to over $100 million, up from $80 million. The uplift is largely due to revised accounting treatment for its submarine modules contract, but it also reflects better-than-expected operating performance.
Just as significantly, Austal confirmed it has finalised a Strategic Shipbuilding Agreement (SSA) with the Australian Government. This agreement locks Austal in as the federal government's long-term shipbuilder for Tier 2 vessels with a pipeline of contracts worth potentially over $4 billion through 2032.
The SSA includes contracts for 18 Landing Craft Medium vessels and potentially eight Landing Craft Heavy vessels. This will drive high-volume throughput and materially improve profitability in Austal's Australasian segment from FY26 onwards.
What does Macquarie say?
Macquarie responded quickly, raising its earnings forecasts for FY25 through FY27 by up to 28%, and increasing its 12-month price target to $7.05. The firm also lifted its valuation multiple range from 13–15x to 15–17x EBIT which is now more aligned with global defence peers who have also seen multiple expansion in recent months.
But despite the upgrade, Macquarie retained a Neutral rating on the stock.
Austal shares are now trading above this price target and so while the SSA is a big strategic win and earnings momentum is improving, the valuation seems to already reflects most of the good news.
The upside and the risks
Macquarie acknowledges there are upside levers still in play namely:
- Stronger-than-expected execution in U.S. programs
- Margin improvement
- Potential for further contract wins
- Strategic interest from major players like Hanwha, which is seeking to increase its holding to nearly 20%
But there are risks too, especially around program delivery, cost performance, and potential delays or funding adjustments in major defence contracts.
Foolish takeaway
Austal's 15% surge this week wasn't just hype, it was driven by real progress: improved earnings, a transformational government deal, and clearer long-term visibility.
But Macquarie's call is clear. After the rally, the stock is now close to fully valued, with limited short-term upside based on current forecasts. The SSA offers long-term upside, but in the near term, much of the excitement may already be priced in.
If you're a long-term investor who believes Austal can execute consistently and expand its global defence role, it's worth watching but for now, Macquarie's verdict seems to be a hold.
