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US Navy puts wind in Austal’s sails

“I guess for me it’s unprecedented really, to see that kind of recognition for an Australian manufacturing company, maybe any company really, by the President of the United States,” says Austal chief executive David Singleton.

“It asks the question doesn’t it, about why does it happen and why is it important? And I suppose it almost felt like it was the final accolade in what has been a tremendously successful program,” he said.

Austal recently celebrated the 20th anniversary of its operations in the US, a costly and ambitious play it launched to expand into the high-value defence sector. But it is a move that is paying off.

Austal’s US manufacturing push started with commercial vessels such as passenger ferries, before it transitioned to defence work from 2004.

President Trump gave the Prime Minister a model of a littoral combat ship, an all-aluminium trimaran combat vessel. It is designed to be multi-operational and has reputedly been described as the “Swiss Army knife of the US Navy fleet”, because different modules can be fitted onto it to change it’s capabilities.

According to Austal, it is the only all-aluminium trimaran in service with any navy in the world.

While Mr Morrison’s gift fits in a glass case, the life-size version measures 127 metres in length and completed versions of it are already operating in US and Asian waters.

An Austal-built littoral combat ship.

An Austal-built littoral combat ship.

Austal has contracts with the US Navy worth more than $US12 billion ($17.5 billion) to manufacture 19 of them. The company is about half way through the bulky contract work, with nine of the ships already delivered.

“To have seen a company go from putting its toe in that particular water with commercial vessels 20 years ago, to a point where we’re the only foreign company in the world, ever, to prime contract ships for the United States Navy is an enormous achievement in a relatively small period of time,” Singleton tells The Age and The Sydney Morning Herald.

It’s not a bad outcome for a business established in Perth in 1988 with the goal of building aluminium boats for the crayfishing industry. It then evolved into a builder of aluminium ferries and has pioneered the multi-hull ferry market.

In the three decades since its establishment, the company has grown into a global high-speed boat building business with operations in Australia and the US, as well as the Philippines, Vietnam and China following an aggressive expansion into Asia over recent years.

I suppose it almost felt like it was the final accolade in what has been a tremendously successful program.

Austal chief executive David Singleton

While the US Navy is a major customer, it has also manufactured boats for other navies including the Royal Australian Navy.

“There’s no question in our mind that the company is in its strongest position ever. Partly because it has now fully consolidated its position in the US, after a major investment in new facilities there made a decade ago,” Mr Singleton said.

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“Our approach in Asia has not been just to set up some shipyards there, but to really gain access to those markets. Initially by building commercial ships in Asia … but to use that as a way of doing more military work in Asia as well,” he noted.

The company’s global position might now be very sound, but the growth has not come without significant headaches.

Austal’s shares are now riding a wave of support, trading at about the $4 mark shortly before Christmas. In November the stock hit a record high of $4.99.

But the stock’s trajectory hasn’t always been upward over the past decade. In 2011 the company’s average share price was $2.048, but by late 2012 it was bumping along at between 50¢ and 60¢. And for the 2012-13 financial year its average share price was a whisker under 80¢.

In 2012, Austal had to undertake a capital raising to repair its balance sheet and reduce indebtedness. The company raised $78 million in the process, overwhelmingly from investors who took $65 million of stock in the institutional component of the offer.

Austal needed the money because its work building the first of its Expeditionary Fast Transport vessels for the US Navy was costing it a lot more than anticipated.

And, in late 2015, Austal gave an update to investors about margin pressure associated with its littoral combat ship program.

An Austal Cape Class vessel built for Australian Border Force.

An Austal Cape Class vessel built for Australian Border Force.

A few months later, in July 2016, Austal told the market it expected to book an earnings loss of up to $116 million for the 2016 financial year, after it wrote down the value of its work in progress on the combat ship program by a hefty $156 million. Design changes had to be made to the vessel to boost its ability to survive a close blast, pushing up construction costs.

A more recent setback for the company, which currently has a market capitalisation of about $1.4 billion, came in January 2019, when it said that the Australian Securities and Investments Commission was investigating announcements it had made about its earnings from the combat ship program. The company’s US operations are also being investigated by US authorities.

Asked about the investigations, Mr Singleton said he is “very comfortable” with it.

“I always fall back on something that I know to be absolutely true about this company, it is ethical and honestly run. I don’t know if we’ve made a mistake here or there, but I’m crystal clear that no one will find anything substantial of embarrassment to the company here, because our culture just doesn’t match that kind of thing,” he said.

As with any investment in a stock, it’s all about the timing. For those who bought Austal shares almost a decade ago in 2010 – and hung onto them – the investment has paid handsome dividends. But it would have been a test of patience as they endured some choppy waters along the way.

One investor that has done well out of Austal is contrarian investment fund Allan Gray, which until recently owned close to 20 per cent of the company’s shares. It now holds less than one per cent of the shipbuilder’s stock.

The fund first bought in to Austal in about 2011, when Austal was trading “in the mid $1s”, according to chief investment officer Simon Mawhinney.

“And 2012 was a terrible, terrible year for Austal, and it ended up falling spectacularly to below $1 and it ended up needing to recapitalise its balance sheet.

“It was a terrible investment for us for the first few years of our existence on its register. (But) there’s a lot of things that attracts us to a company like Austal, they have a very good product with respect to their aluminium hull boats and the IP [intellectual property] that surrounds these things. And they’re a very entrepreneurial company,” he noted.

It was a terrible investment for us for the first few years of our existence on its register.

Simon Mawhinney, chief investment officer with Allan Gray

“There’s very little that they do that isn’t very long-term focussed. And so they don’t pander towards the short-termism that we fund managers often force, unfortunately, management and boards to do. And they just happen to be at a point in the cycle where their ships have been highly sought after,” he said.

Crucial to the company’s strong recovery, notes Singleton, has been “getting the US to operate in the way that it should be operating, and that’s been long hard work. And the US people have done a great job in doing that.”

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Austal’s boss, who used to lead Poseidon Nickel, also cited the contribution from the improved profitability of the manufacturer’s operations outside of the US.

Industrial analyst with Hartleys, Oliver Stevens, has a neutral rating on Austal shares and a $4.05 price target.

While military-related work is a crucial plank of Austal’s workload, it is also winning orders to build large, fast commercial ferries for companies around the world. Its most recently awarded contract was a $136 million deal, announced in October, to build a 115 metre high speed catamaran for the Danish company Molsinjen.

“I think it’s in a very strong condition at the moment. You’ve got a very strong balance sheet, good order book for the upcoming period, it’s pretty well placed,” Stevens says of the current state of Austal.

“I think the big thing that’s coming up is in July next year. The US Navy will be awarding the new Future Frigate Program FFG(X). And under that program they’re looking to build 20 of these frigates, at a total cost of about $US20 billion. And the initial contract will be for up to 10 ships,” he says.

While the future of the company was initially tied to the health of the crayfishing industry, today it seems its future is strongly tied to the might of the US military and its wish to maintain naval superiority.

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