Small Cap: AUSTAL (ASB)

This Small Cap produces commercial and defence ships, but the key are its three defence programs, in Australia, the Philippines, and by far and away the most important, in the US.

This Small Cap is the world leader at making aluminium twin hull ships, called Joint High Speed Vessels (LHSV), which are 103m long and are used by navies to transport troops. It also makes the Littoral Combat Ship (LCS) which operate between the shore and the deep sea.

In Austal's business, ships are more expensive to build at the start of the program because they are bespoke in nature. Volumes mean a great deal when it comes to profitability.

How much you would have made.

We tipped Austal at 62 cents in May 2013. About two and a half years later it traded as high as $2.20, delivering a return for subscribers who followed us of 262% and in June 2020 it is trading at $3.42 with a return of 494% including a dividend yield of 1.8%.

Why did this Small Cap make money?

This Small Cap has the most demanding customer in the world – the US government. It has a huge order book from that customer but its market cap was initially in our universe (of companies worth under $300m).

The investment lesson

This Small Cap came under our “Fallen Angel” classification. It was a big company that had big sales and big capital requirements. Unfortunately it had taken on too much debt. We saw an opportunity after the group had undertaken a capital raising and had reduced the pressure on its earnings.

Want to know more about this Small Cap?

Australia’s ship building champion
The transformation of Australian ship builder Austal in the past few years is nothing short of amazing. Since we first covered it three years ago, its workforce has grown from 1000 to 5000, while its revenue has increased from about $400 million to $1.5 billion. It has gone from being an ASX 400 sized company, to being in the ASX 200.

Last year it achieved a record profit of $52.2 million and a record order book at $3 billion. When we first covered it, the company was $11 million and its order book was in the region of $800 million.

The group now has three ship yards. Its biggest is in Alabama, US, while its oldest is in Henderson, Western Australia, and its newest is in Cebu, the Philippines.

It main production for the US government is of the Littoral Combat Ship, which sell for about US$400 million (A$563 million) each and are used for fighting close to shore; and of the high speed troop carrier, which was called the Joint High Speed Vessel and has been renamed Expeditionary Fast Transport. You can buy one for US$160 million.

We spoke to the group’s managing director Andrew Bellamy to find out what’s next:

“We’ve got 14 ships contracted in the US which takes us through to 2010, on top of the six we’ve constructed. These days we’ve got a lot more visibility about our pipeline than when we started. We know now what we’re building.”

This is the big risk in custom ship building, because when a new contract is awarded, the boat is designed from scratch. Consequently, economies of scale only come about after three or four are produced. This was highlighted earlier in the year when Australia’s Federal Government announced that the costs for building the Air Warfare Destroyer (AWD) project had blown out by $1.2 billion to around $9 billion. The report the government released revealed that each of the three new ships are expected to be completed more than two and a half years behind schedule, but did not say why.

Austal has now delivered 250 ships around the world, on time and on budget. The big hope for investors is that it gets a significant slice of the $79 billion that the Australian Government said it intends to tender on AWD over the next 20 years. Some of the ships the government wants are known as Offshore Patrol Vessels, which are similar in size and capability to the High Speed Support Vessels Austal is building out of its Henderson facility for the government of Oman. Says Bellamy: “That announcement got our attention and we think we’re a pretty good shout at building those ships.”

If Australia’s Federal Government is looking for a national champion in the ship building arena, it need look no further than Austal.

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