Company Overview: Austal Limited (ASX: ASB) is a global shipbuilder and defence prime contractor. The company is mainly involved in the designing and construction of defence and commercial vessels for the world's leading operators. The company’s commercial vessel platforms include high-speed passenger ferries and vehicle-passenger (ROPAX) ferries. ASB commenced its operations in the year 1988 and in the past 30 years, it has contracted 300 vessels for 100 operators in 54 countries around the world.
ASB Details
Long-term Growth Supported by Ongoing Shipbuilding Programs: Austal Limited (ASX: ASB) is Australia’s leading defence exporter and a global shipbuilder with industry-leading shipyards in Australia, the United States of America, Philippines and Vietnam. The company’s sustainment portfolio offers in-service support to commercial and defence operators around the world. As on 15 April 2021, the company’s market capitalisation stood at ~$888.10 million. Despite unprecedented global economic volatility during FY20, ASB had reported 30.5% YoY in EBITDA and 45% YoY growth in NPAT, demonstrating its ability to adapt its operations in increasingly volatile global environment, while maintaining efficiency and consistency across its shipbuilding programs and support services. During FY20, both the USA segment and Australasia segment performed decently and witnessed improvement in shipbuilding margins. From 2016 to 2020, the company’s revenue grew at a CAGR of 11.7%. Over the same period, the company’s dividend has grown at a CAGR of 18.92%.
Looking ahead, the company is focused on delivering its existing pipeline, growing its business and providing long-term value to its stakeholders. In the coming years, ASB expects to achieve growth in Defence Support services as more vessels are to be delivered. ASB is of the view that it has the capability to deliver steel & aluminium shipbuilding and sustainment in commercial & defence sectors. With the order book of around $2.9 billion and net cash of ~$260 million (as at 31 December 2020), the company seems well placed to navigate through the COVID-19 pandemic and invest for future growth.
5-Year Financial Summary (Data Source: Refinitiv, Thomson Reuters, Company Reports, Analysis by Kalkine Group)
Decent Growth in H1FY21 NPAT: For the half-year ended 31 December 2020, the company reported total revenue of $840 million, down by 19% on the previous corresponding period (pcp), due to the negative impact of reduced throughput and foreign exchange (FX) headwinds. USA segment reported total revenue of $641.6 million and Australasia segment reported revenue of $205.87 million for H1FY21. EBIT for H1FY21 stood at $70.5 million, up 18% on pcp, driven by the strength of USA and Australasia margin. NPAT for H1FY21 stood at $52.4 million, up by 29% on pcp. Over the period, ASB delivered 10 major new vessels worldwide. ASB also completed the acquisition of BSE Maritime Services in Cairns and Brisbane, Queensland, which expanded its sustainment footprint in Australia. As at 31 December 2020, the company had net cash of $260.2 million.
H1FY21 Results (Source: Company Reports)
FY20 Result highlights: For the year ended 30 June 2020, the company had reported total revenue of ~$2.1 billion, up from ~$1.85 billion in FY19, supported by favourable FX translation, expansion of commercial shipbuilding and revenue growth in USA. In FY20, the company delivered 9 major new vessels and received order for a further 10 vessels. During FY20, the company witnessed increased contribution and improved margins from Australasia segment, resulting from the completion of the investment and reorganisation of this division over the past three years. NPAT for FY20 stood at ~$88.978 million in FY20, up 45% on FY19.
FY20 Results (Source: Company Reports)
Key Metrics: ASB has reported improved profitability margins in FY20, compared to FY19, supported by favourable FX translation, expansion of commercial shipbuilding and revenue growth in the USA. Gross margin for FY20 stood at 10.9%, up from 9.9% in FY19. EBITDA margin in FY20 stood at 8.3%, up from 7.2% in FY19. Current ratio for FY20 stood at 1.99x, up from 1.43x in FY19.
Profitability Metrics and Liquidity Profile; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Top 10 Shareholders: The top 10 shareholders together form around 33.19% of the total shareholding while the top four constitutes the maximum holding. Rothwell (John) and BlackRock Investment Management (Australia) Ltd. are holding a maximum stake in the company at 9.11% and 5.44%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Commenced Construction of New Steel Shipbuilding Facility: On 29 March 2021, ASB announced that the construction on Austal USA’s new steel shipbuilding facility, in Mobile, Alabama has officially started. This new steel shipbuilding facility will help Austal USA in targeting various major steel shipbuilding programs included in the U.S. Navy’s shipbuilding plan and it will allow Austal USA to build the next generation of the U.S. Navy and U.S. Coast Guards’ ships. It is expected that the construction of the facility will be completed by April 2022.
Delivers 9th Guardian Class Patrol Boat: On 17 March 2021, the company announced that it has delivered the ninth Guardian-class Patrol Boat (GCPB) to the Australian Department of Defence, as part of the Australian Government’s Pacific Maritime Security Program. It is expected that the delivery of this vessel will further enhance the relationship of ASB with both the Australian Department of Defence and the Papua New Guinea Defence Force.
Delivered Largest High-Speed Ferry Constructed in Philippines: On 1 March 2021, ASB had announced that Austal Philippines has successfully delivered Hull 419, the largest high-speed ferry ever built in the Philippines, to Fjord Line of Norway. The company is now preparing for the launch of Hull 395, which is a sister ship to Bajamar Express, constructed at Austal Australia. The launch is scheduled in the 2nd quarter of CY2021.
Track Record of Paying Dividend: Due to the improved financial performance in FY20, ASB paid total dividend of 8.0 cents per share (unfranked) in FY20, up from 6.0 cents per share (unfranked) in FY2019. From FY16 to FY20, the company’s dividend grew at a CAGR of 18.92%. For H1FY21, ASB has declared an unfranked interim dividend of 4 cents per share, up 33%% on the pcp. The dividend is payable on 22 April 2021 with an ex-date of 17 March 2021. At the CMP of $2.550, the company’s annual dividend yield stood at 3.52%.
Dividend Trend (Source: Company Reports)
Key Risks: The company is exposed to the risk related to the fluctuations in the foreign currency. Further, it is also exposed to the risk and uncertainties caused by the COVID-19 pandemic. ASB’s expansion in Asia exposes it a number of risks that are typical when entering new jurisdictions or expanding in others. ASB is also exposed to risk related to the availability of US government funding due to budgetary or debt ceiling constraints; changes in customer priorities or their ability to meet contractual requirements, additional costs or schedule revisions.
Outlook: ASB continues to make investments in new designs and R&D, particularly digital systems. As a result, it now has a growing range of digital enabled products & services. Moving forward, Defence Support will continue to be a key strategic focus for the company. Further, the emerging support opportunities are expected to contribute to growth in the future. It is expected that support revenue can rise to $500 million in the next few years as ship deliveries & other initiatives occur. For FY21, the company expects its revenue to be around $1.65 billion and EBIT to be around $127 million. FY22 baseline revenue is expected to be around $1.4 billion.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last six months, the stock has corrected by 23.95% and is trading lower than the average 52-week price level band of $1.980 -$3.860, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$2.148 and resistance of ~$3.427. We have valued the stock using P/E multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). We believe the company can trade at a premium to its peer mean P/E (NTM trading multiple), considering the company’s improved H1FY21 results, rise in dividend, and modest outlook. We have taken peers like Electro Optic Systems Holdings Ltd (ASX: EOS), PTB Group Ltd (ASX: PTB), Quickstep Holdings Ltd (ASX: QHL) etc., which comes under Aerospace & Defence Sector. Considering the company’s healthy balance sheet, decent order book, improved bottom line in H1FY21, rise in H1FY21 dividend, current trading level and valuation, we give a ‘Buy’ recommendation to the stock at the current market price of $2.550, up by 3.238% as on 15 April 2021.
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ASB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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