Everything Shipshape At Austal
Get More Commentary, Discussion & Market Information On -
At a time when Australian manufacturing is considered to be heading the way of the Tasmanian Tiger, the Austal story is a good antidote to the doom and gloom.
It is a very long way from building aluminium dinghies for the Fremantle crayfishing fleet to building $350 million warships for the US Navy, but that is the journey that Western Australia-based Austal Limited (ASB) has taken in the last 40 years.
John Rothwell, the founder (and now non-executive chairman) of Austal, progressed from building the fishing “tinnies” to working on Alan Bond’s four America’s Cup campaigns in the late 1970s and early 1980s. Rothwell took the skills developed in aluminium boat design and construction and founded Austal in 1988, looking to build high-quality commercial vessels. Starting with ferries, the operation moved into small patrol boats, and started to develop traction in the international market.
Now Austal has more than $US5 billion worth of contracts to build advanced aluminium warships for the US Navy, as well as a swag of work at home. At a time when Australian manufacturing is considered to be heading the way of the Tasmanian Tiger, the Austal story is a good antidote to the doom and gloom.
Listed on the stock market since 1998, Austal expanded out of its home yard at Henderson, south of Perth, and built its product base through the acquisitions of fellow WA shipbuilding companies Image Marine and Oceanfast. In 1999 it established a US shipyard, in Mobile, Alabama. In 2010 the company diversified by buying Canberra-based Australian Technology Information, which provides a range of services such as systems engineering and integration, information technology, verification and validation and support systems. In 2013, Austal established a shipyard at Cebu in the Philippines.
So far Austal has built ships for the US Navy, the US Marine Corps, the Royal Australian Navy, the Australian Customs and Border Protection Service, the Bermuda Police, the New South Wales Police, the Western Australian Police, the Queensland Police, and the armed forces of Malta, Yemen, Kuwait and Trinidad & Tobago.
Austal has also built passenger and vehicle ferries and tourism vessels for operators in the USA, Australia, New Caledonia, Hong Kong, Japan, Venezuela, Greece, Germany, Portugal, Spain, Norway, Italy, Turkey, France, Ireland, Poland, Estonia, Denmark, Trinidad & Tobago, the Virgin Islands, Korea, Tahiti, Morocco, Saudi Arabia, Dubai, Oman, Indonesia, the Maldives, the Bahamas, the Marshall Islands and Malta. The company also makes offshore work boats that serve the resources and wind-farm industries, and has even built a couple of private vessels.
Austal has progressively built its expertise and capabilities to include larger vessels, with a “game-changer” development coming in 2005, when it delivered the 127-metre ferry Benchijigura Express, which operates in the Canary Islands. That vessel was Austal’s first large trimaran delivery, and provided the design base for the biggest deal Austal has struck, its contract with the US Navy to build up to ten littoral combat ships (LCSs), which are lightly-armed vessels designed for missions in the littoral zone, or waters close to shore. Starting with an initial $US432 million contract for one ship, with an option for nine others, the LCS contract has evolved into a $US3.5 billion contract it has with the US Navy to construct ten LCSs.
Austal’s first LCS, the USS Independence, was launched in April 2008, and commissioned in January 2010. The second vessel in the program, the USS Coronado, was launched in September 2013 and is scheduled for commissioning in April 2014.
The first two ships Austal delivered were part of a sub-contract with US defence giant General Dynamics: the company’s first ship as prime contractor, USS Jackson (LCS-6), was launched in December 2013 and is preparing for sea trials before its official delivery to the US Navy, expected in 2014. USS Montgomery (LCS-8) is scheduled to be launched in the June 2014 quarter. Austal has five trimaran LCSs under various stages of construction at Mobile.
The US Navy's trimaran Littoral Combat Ship, the future USS Independence (LCS 2), during Sea Trials in the Gulf of Mexico.
Apart from the LCS contract, Austal also has a US$1.6 billion contract with the US Navy to build ten 103-metre Joint High Speed Vessels (JSHVs) for the US Navy, all of which are fully funded. Two of these vessels have already been delivered, with JHSV-3 expected to be delivered by the end of March. Another three JHSVs are being built at Mobile at the moment.
The Joint High Speed Vessel (JHSV) boats are high-speed, shallow-draft catamaran vessels designed for rapid transport of medium-sized cargo loads – the idea is to transport a US Army or US Marine Corps company-sized units with their vehicles, or transport an infantry battalion.
The JHSVs will reach speeds of 35–45 knots (65–83 km/h; 40–52 mph) and will allow for the rapid transit and deployment of conventional or special forces, as well as equipment and supplies. They have a flight deck for helicopters and a load ramp that allows vehicles to drive on and off the ship quickly.
The class is designed for use with the port infrastructure common in developing countries. The JHSVs can support a variety of operations, from typical military logistics missions through to humanitarian support or disaster response tasks, or by supporting maritime law enforcement activities.
The first ship in the class, USNS Spearhead, was delivered to Military Sealift Command in December 2012 – eight months late and US$31 million over budget – and was followed by USNS Choctaw County in June 2013. The third vessel, USNS Millinocket, completed acceptance trials in the Gulf of Mexico in January, and the fourth ship, USNS Fall River, was launched several days later. (‘USNS’ stands for United States Naval Ship: it designates ships not yet commissioned into the Navy.)
The US Navy contracts are lucrative and highly prestigious shipbuilding jobs – but their high profile means that any problems are also well-publicised. The LCS program has been plagued by systems failures problems that have affected the ships’ reliability: in January, the Pentagon reduced the number of ships it will buy under the program from 52 to 32.
The initial US$32 billion plan to build 52 ships by 2026, in two versions, the single-hull class built by Lockheed Martin and Austal’s trimarans, has stumbled amid a litany of problems. These have been shared between the two platforms, with the annual report of the US Defense Department’s director of operational testing laying out the problems experienced by the Lockheed Martin-built USS Freedom with its diesel-powered generators, air compressors and propulsion system; while the Austal-built USS Independence has been “degraded by equipment failures, including problems with operator consoles, power generation equipment, components of the ‘Total Ship Computing’ system, internal networks, propulsion drive-train components, communications systems and mission package support systems,” says the report.
Also, Austal’s debt blew out as a result of losses incurred in the LCS work, necessitating an emergency $78 million entitlement capital raising in November 2012, which was priced at half the prevailing share price. While this significantly improved the debt position and the balance sheet, it heavily diluted some of the founding shareholders: however, this enabled institutional investors such as Allan Gray Australia and BT to take over at the top of the share register, which is always a better look.
Now Austal says the six funded LCSs it is working on are the backbone of its $2.4 billion order book - as at December 2013 - which secures work through to 2018. Also in that order book are two JHSVs funded and delivered out of a ten-vessel contract, one Australian Customs Cape Class Patrol Boat has been delivered out of an eight-vessel contract and there are three 27-metre and one 21-metre wind farm support catamarans. The company’s $330 million contract (plus a $50 million service element) to build Cape Class Patrol Boats for the Australian Customs and Border Protection Service underwrites work at the Henderson shipyard until the first half of FY2016. More than 95% of current work and the order book is military or para-military.
For the FY13 full-year, Austal reported record revenue of $902.8 million, up 38%, and net profit of $35.7 million, more than three times the $11 million earned in FY12. The net result was augmented by the recognition of $11 million worth of non-cash research and development tax credits from prior years. Underlying operating profit more than doubled, to $26.7 million.
For the first half of FY14, Austal reported a 30% lift in revenue, to $507.6 million, and net profit that rose 76%, to $9.5 million. US revenue grew by 33%, while the Philippines shipyard boosted revenue by 46%. Australian revenue increased by 3.6%. Importantly, net debt was reduced by 22% to $113.7 million, helped by a surplus land sale for $21 million.
Broking firm Macquarie estimates the total LCS contract will add US$700m to annual revenue by FY15, while the JHSVs should generate annual revenue of about $280 million. As far as Austal will go is that it says it will meet guidance of $1 billion in revenue for the full year FY14.
Helping optimism was this week’s announcement of a $US125 million ($A138.7 million) contract to build two ships for an unidentified naval customer in the Middle East. Austal will build two 72-metre high-speed support vessels at its shipyard in Henderson in Western Australia. The ships will offer a range of capabilities to support naval operations, including helicopter operations, rapid deployment of military personnel and cargo, and search-and-rescue operations.
Austal has struggled in recent years, showing a loss of 8.8% a year over five years and 33% a year over three years, but it has turned the corner in performance, climbing 30.4% over the last 12 months. On consensus estimates the stock is trading at 7.3 times prospective FY15 earnings, and a prospective dividend yield of 5.6%, unlikely to be fully franked. More interestingly, at 88 cents, Austal is priced 30% below the consensus target price of the analysts that follow it, who see it trading at $1.14.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au