ASX defence stocks like Austal Ltd (ASX: ASB) have ridden a rollercoaster over the last 12 months.
Austal is an Australian-based shipbuilder that specialises in the design, construction, and support of defence and commercial vessels globally.
Austal's products include naval vessels, defence surface warfare combatants, high-speed support vessels, patrol boats for law enforcement, offshore vessels, as well as passenger and vehicle ferries.
The company also installs and maintains vessel command and control systems, communication and radar technology, and information management systems.
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A rollercoaster for Austal shares
Global conflict and defence spending sent Austal shares soaring in early 2026.
In January, Austal shares hit all time highs of almost $9 per share.
However since then, they have been on a steady decline, closing last week at $4.19.
This drop represents almost a 40% dip year to date.
Unfortunately for investors looking to buy the dip, a new report from Bell Potter indicates there are potential headwinds emerging for Austal shares.
Complexity lies ahead
According to a new report from Bell Potter, Austal has a record $17.7 billion order book, giving it strong long-term growth.
But delivering all this work won't be easy. Bell Potter highlights three main risks:
- Austal is starting several new steel shipbuilding projects at the same time in new facilities, which could lead to early operational problems and delays.
- Some contracts are particularly challenging. For example, the T-AGOS ships have a very complex design that could require costly rework, while the OPC program is under government scrutiny, which could create additional risks and pressure on profits.
- Austal plans to significantly expand its operations in Henderson over the next 12–18 months. If it struggles to hire enough skilled workers, construction of the LCM and LCH vessels could be delayed.
In simple terms, the company has plenty of work lined up, but its biggest challenge is executing it well.
If it can avoid delays, cost overruns, and labour shortages, the large order book should translate into strong earnings. If not, profits could come under pressure even though demand remains high.
Tailwinds for Austal shares
On the positive side, Bell Potter highlighted that Austal is well positioned to benefit from major increases in defence spending in both the US and Australia.
Its shipyards are considered strategically important to expanding naval fleets, giving the company a long-term pipeline of work and strong growth opportunities over the coming decades.
In Australia, ASB holds strategic importance to the shipbuilding industrial base with its appointment by the CoA as Strategic Shipbuilder under the SSA.
The SSA guarantees a continuous, decades-long pipeline of work, estimated by management at over A$20b over 20 years, providing the stability needed to attract, train, and retain a highly skilled local workforce.
Price target downgrade for Austal shares
Based on this guidance, the team at Bell Potter has downgraded its share price target for Austal shares to $4.10 (previously $6.30).
This indicates that the current share price is slightly above fair value.
The broker has retained its hold recommendation on Austal shares.
Although the valuation/growth arithmetic appears attractive, we believe we are entering a period of elevated risks as ASB ramps up several shipbuilding programs.
