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Austal Limited : Should you buy?

Sep 09, 2015 | Team Kalkine
Austal Limited : Should you buy?

Austal Limited
 
  • The shipbuilder saw a fall in share prices despite reporting record full year revenue and earnings which were ahead of consensus expectations.The stock dipped despite the management announcement of a 26% increase in revenue to $1.41 billion and a 12% jump in underlying earnings before interest and tax (EBIT) to $73.2 million for the year ended June 30, 2015.Revenue and EBIT are the highest in the 27 year history of the company 27-year history and imply an underlying earnings per share (EPS) of 13.1 cents. Revenue and EPS were a little above the average analysts’ forecast on Reuters of $1.36 billion and 13 cents a share.Management also declared a fully franked 3 cent a share final dividend to take its full year dividend to 4 cents a share. However, it seems to us that this was not enough to halt profit taking because the stock has risen more than 60% over the past year and investors could be worried about issues at its US facility which accounted for 98% of the total revenue. The company is building the Littoral Combat Ship (LCS) for the US navy and has gone through cost problems because of its inexperience as a prime contractor.
 
     Austal Financial Highlights (Source - Company Reports)
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Results for the year ended 30 June 2015
 
  • The company announced record earnings and profits for the year with a 66.8% growth in net profit after tax to $ 53.2 million. The best results in the 27 year history of the company was generated from a 26% increase in revenues to $ 1.41 billion achieved from multiple vessel programs including major ones from the U.S. Navy, the Australian Border Force and the Royal Navy of Oman. The Board of Directors has declared a fully franked final dividend of 3 cents per share after resuming dividend payments earlier this year with an interim dividend of 1 cent per share. Other highlights included a reduction in net debt to $ 6.1 million, an order book of $ 3.1 billion which will guarantee construction work through the calendar year 2020.
       
       Austal Products (Source - Company Reports)
  • CEO Andrew Bellamy said that the results show how the company has evolved and that it now has the capability to deliver on major contracts from its three shipyards in the USA, Australia and the Philippines. The company perform well on its US Joint High Speed Vessel contract and was able to generate strong earnings from Australia through improvement in its programs to build Cape Class Patrol Boats. This was able to offset the expected pressure on margins Littoral Combat Ship 6 which was due to its lack of experience and design experience in its first vessel as prime contractor. Littoral Combat Ship 6 has now been delivered and the experience is being used for the remaining nine ships being constructed under the USD 3.5 billion contract.
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Review of operations
 
  • Austal USA reported revenues of $ 1.11 billion and segment EBIT of $ 58.4 million at a margin of 5.2%. As mentioned earlier, there were schedule and margin pressures on the LCS program because of inexperience though there will be improvements in margins on the future ships to be delivered. The 10 ship JHSV program worth USD 1.6 billion continues to make progress and, because the program is well advanced, the company has concluded efficient delivery and production plans. 2 vessels were delivered in FY 2015 and a further four are in various stages of construction. In Australia, the company reported improved earnings on the CCPB contract worth $ 330 million and segment revenue was $ 211.8 million with EBIT of $ 31.8 million and margins of 15% compared to 6.9% in the previous year. Four CCPB vessels were delivered in FY 2015 with an additional vessel in July 2015. Meanwhile, there was good progress on a contract worth $ 124.9 million for 2 72 m High Speed Support Vessels from the Royal Navy of Oman. The shipyard in the Philippines reported revenues of $ 38.7 million and segment EBIT of $ 1 million at a margin of 2.6% compared to 8% in the previous year. It delivered a 21 meter windform vessel to Turbine Transfers, performed customisation work on hull 270 before delivering to Condor Ferries and started work on a 58 m high speed catamaran crew boat which is due for delivery in the third quarter of 2016.
       
          Austal Segments (Source - Company Reports)

Management of cash and capital
 
  • The company's net debt position reduced from $ 71.5 million as at 30 June 2014 to $ 6.1 million as at 30 June 2015. The improvement was due to the strong cash flow generated by operations of $ 110.4 million which included a contribution of $ 54.1 million under the contract with ferry operator Condor. The company ended the year with a cash position of $ 148.5 million and the leverage ratio of 0.06. This improvement in net debt was achieved despite a devaluation of the AUD and the infrastructure long-term debt which is denominated in USD. Cash was also used from the progress payments received in advance in the first half of FY 2015. Going forward, the company expects to be in a net cash position by the end of FY 2016 because of cash generation from the many diverse programs. This will enable the company to fund growth opportunities and support dividends while continuing the repayment of debt. Discussions on a new funding facility from banks are progressing well and will be finalised in the next few months. The company has intercompany loans of $ 65.3 million made to the US operation but, because the subsidiary holds the loan in USD but the parent company in AUD, there was an impact of mark to market revaluation. The company is in the process of converting the loan to equity to nullify the impact of currency translation or operations.
      

Future outlook
 
  • The strategic initiatives of the company to build on its order book of $ 3.1 billion include sustaining the business with further contracts for the existing ship designs, improving cost base and productivity, diversifying the business through annuity style contracts and scaling up the business through further consolidation in Australia.

  • We believe that the expected continuing weakness of the AUD will continue to benefit the company on currency translation while improving the competitiveness of its Australian operations. We would view the current decline in share prices as a buying opportunity and rate the stock as a Buy at the current price of $2.19 .

 

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The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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