Austal Receives US$50m from US Government | KOSEC

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Austal Receives US$50m from US Government

Caroline Wong

Caroline Wong is a Research Analyst at KOSEC - Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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Austal Limited (ASX: ASB) has recently been chosen by the United States (US) Department of Defence (DoD) to support the US Navy shipbuilding industrial base in the pursuit of maintaining, protecting and expanding US domestic production of steel shipbuilding. This will take place over the next 24 months, beginning in June 2020. Specifically, US50 million will be paid through the Defence Production Act Title III Agreement to ASB’s American division. Currently, the company is in a trading halt which will resume on Tuesday the 23rd of June after information has been released to the market.

The exact scope of the agreement is still being specified, and details will be released in the coming months. Funds coming in from the project are being geared towards reinvestment into increased capacity in the US Mobile shipyard in Alabama. This puts the Perth-headquartered company in a position for growth. Reinvestment on Austal’s part will likely match the Defence Production Act of US50 million, which will bring the total to around US100 million to be invested. Positive effects will be felt in the long-term with naval readiness as well as the capacity for ASB’s future projects.

This investment agreement is a part of the US response to the COVID-19 pandemic and will help support the local economy and create jobs. The effect of COVID-19 has had a limited impact on the company, which has allowed it to operate at a healthy capacity over the USA, Australia, Philippines, and Vietnam. Existing contracts that allow ASB to build aluminium-hulled Littoral combat ships (LCS) and expeditionary fast transport vessels in Alabama until 2024 will support the area in conjunction with the new agreement.

The announcement on the 22nd of June follows the announcement on the 18th of June, where modifications were made to a previously awarded Littoral Combat Ship (LCS) contract. More importantly, the changes provides Austral with a potential additional value of US43 million. A Goldman Sachs analyst reaffirmed that this contract has firmed up Austal’s position within the US Navy industrial base and bodes well for future involvement with the DoD. The funding agreement comes at a time where Austal is in negotiations regarding strategic shipyards facing the South China Sea since last year, which would become important if China decides to push into the region.

Unfortunately, last month ASB missed out on a US795 million contract to build new guided-missile frigates for the DoD, which competitor Fincantieri won. This was a massive blow to ASB, where a potential nine ship pipeline was lost, representative of a potential US5.58 billion dollars. Despite missing out on specific contracts, the company has a strong history and with this new contract has firmed up relations with DoD as a reliable shipbuilder.

By Caroline Wong 

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