With defence spending increasing in Australia and global tensions high, it's fair to say that the outlook for local shipbuilder Austal Ltd (ASX: ASB) is looking ship shape.
Now that we have that terrible pun out of the way, let's move on to the serious business of having a look at how the company is travelling, and indeed, things are looking good.
The company held its annual general meeting (AGM) this week, and reiterated the theme that defence spending as a proportion of gross domestic product is trending upwards.
Earnings set to grow
Managing director Paddy Gregg, in his presentation to the AGM, said the company was building from a solid base with near-record underlying earnings of $113.4 million "ahead of expectations" in FY25 and up strongly from $56.4 million the previous year.
And promisingly the company could expect "continued growth … for years based on order book and government-announced contracts''.
There would also be additional opportunities for growth via the AUKUS defence agreement between Australia, the US and the UK under which Australia will procure its next generation of submarines.
Mr Gregg said the company was expecting earnings to continue to grow this year to $135 million, with key drivers the company's record order book, an increased volume of work in Asia and increased orders expected under Australia's Strategic Shipbuilding Agreement.
Stocks worth a look
The team at Macquarie have run the ruler over the Austal balance sheet, and like what they see.
Austal's diversified order book "positions it strongly for medium-term earnings growth", the Macquarie analysts said in a research note sent to clients this week.
As they said:
Austal is one of few ASX firms that provides exposure to rising global defence spending including material exposure to the US (about 75% of FY25 revenue).
The Macquarie analysts said the company was tracking well towards its FY27 revenue target of $500 million, "with addressable market growing in both US and Australia and investment in (its) San Diego floating dock ongoing''.
They noted that once the San Diego dock was operational in early FY26, it would enable Austal to work on non-Austal ships.
Macquarie has upgraded Austal shares from a neutral rating to outperform and has a price target of $8.10 on the shares compared with the $6.81 closing price on Wednesday.
If that level is reached, shareholders would be sitting on gains of 18.9% over a 12-month period.
Austal does not pay dividends. The company was valued at $2.87 billion at the close of trade on Wednesday.
