Austal Limited (ASX:ASB) is an Australian Shipbuilder and global defence contractor which designs, manufactures and supports high performance vessels for commercial and defence customers worldwide.
Based in Western Australia, this ship builder has built both commercial and defence based ships for many years and have many forward contracts to continue building these ships with the Australian Government.
Key Financial Information
Market Cap
Currently, (May 4th 2020) the market cap of Austal sits at around 960 million AUD.
Revenue
According to the companies half year report (1H FY20) the company had $1.04B of revenue, $59.9m of Earnings Before Interest and Tax (EBIT) and a Net Profit After Tax (NPAT) of $40.8m. The company has given guidance, that was reaffirmed during the COVID-19 pandemic, of Revenue no less than $1.9 billion, EBIT of no less than $110 million and US ship building margin of 7.5-8.5 per cent. The company has also affirmed their dividend (already paid) of 3 cents per share, unfranked. With suggestion that the final dividend would be a further 3 cents per share.
The company has stated that it had a Net Cash Position of $152.4 million and an Operating Cash Flow of $22.1m AUD for the half.
The company has stated that it has $4.3 billion of outstanding orders, which if we go by previous Revenue, we can estimate that there are approximately 2 years of outstanding orders.
Recently, the company announced that it did not win the US Navy Frigate tender. This news was not taken lightly as the share price fell 20% on the day. However, Austal was awarded a smaller contract with the Australian Government, totalling a further $324 million to future orders.
Valuation
Based on Austal’s half year earnings we will try to calculate forward looking PE and dividend yields.
We know the following (half year); Revenue of $1.04b, EBIT $59.9m, NPAT $40.8m, Dividends $0.03 and Earnings Per Share of 11.5 cents.
EBIT/Revenue of 5.76%.
NPAT/Revenue of 3.92%.
Dividend Yield of 2.23%.
Dividend Payout Ratio of 26%.
PE Ratio of 11.70.
Charts
As we can see from the chart above, the share price has fluctuated in between the upper and lower bars during the COVID-19 crisis. The RSI tells us that it is fairly priced, no over reaction to recent news according to RSI.
The MACD shows that the shares have moved to a slight BEARISH form. This is heavily influenced from the recent sell off. For now I watch to see what happens with both the RSI and MACD.
As you can see in the graph above, the Aerospace and Defence index has outperformed the MSCI World index by quite a substantial amount since March 2005. It can also be said that it experienced more volatility in the market when there were pullbacks in the market. The large fall off seen in March 2020 is largely contributed to the largest defence companies taking a very harsh fall, companies like Lockheed Martin, Boeing and Airbus. Watching for either a dead-cat bounce or a stronger recovery.
Discussion
While having 7 shipyards in 5 different countries does provide extra exposure to the shipbuilding industry, it also leaves it vulnerable due to possible specific government shutdown.
Austal has seen some growth in it’s maintenance of its vessels which in the long run will help the company turn towards a services company rather than a manufacturing company, if they wish to do so. As they build more vessels there will be a need to maintain these vessels, this is where Austal makes it’s largest EBIT margin in both Australasia and in the United States. And as there are more vessels created, this EBIT value will increase and hopefully so will the EBIT margin.
Austal is also heavily reliant on material cost to make money, margins in Australasian ship building are low. These are some key risks to consider. With their largest margin coming from maintenance of their vessels as discussed.
I do not have a position in Austal, watching carefully.
Disclaimer
The information in this article is for general purposes only and should not be considered as advice to any persons. No monies should be invested based on what is contained in this article. I do not currently own Austal LTD (ASX:ASB) shares at time of writing this article.
