Why Austral’s share price has surged to a 4-year high

Brendon Lau | February 4, 2019 |More on: ABCASBBLDLLC

The Austal Limited(ASX: ASB) share price surged to a four-year high after management released a profit upgrade for the current financial year.

The ASB share price jumped 9.5% to $2.19 in morning trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index traded flat.

Austal is cum-consensus upgrade as brokers will be scurrying to increase their FY19 revenue and earnings estimates for the shipbuilder.

The good news during the “confession season” will be a welcomed change for investors as companies have typically used this period to downgrade expectations ahead of their official results announcements this month.

Some notable sinners that have issued a profit warning recently include Boral Limited(ASX: BLD), Adelaide Brighton Ltd.(ASX: ABC) and Lendlease Group(ASX: LLC).

Profit upgrade details

But not Austal. It lifted its FY19 revenue guidance to around $1.9 billion from its initial estimate of $1.3 billion to $1.4 billion and is predicting a material jump in earnings when it hands in its first half results later this month.

While margins across different projects vary and tends to be skinnier at the start of construction, management is forecasting 1HFY19 earnings before interest and tax (EBIT) to range between $39 million and $41 million.

That is a significant increase over the $29.2 million that management posted in the first half of FY18.

This is assuming that the Australian dollar stays around US72 cents for the year, but it isn’t just because of the favourable exchange rate that is boosting the company’s top and bottom lines.

The better than expected result is also driven by a greater number of orders for the Littoral Combat Ships (LCS) that it’s building in the US, better than expected progress in the construction of previous previously awarded LCS, an earlier than expected receipt of long-lead materials contracts and more work coming through its newly completed Vietnam ship yard.

Foolish takeaway

The geo-political uncertainty that’s clouding the outlook for many other stocks on the ASX has been a boon to Austal. The stock is shaping up to be a good contrarian play as rising global tensions is fuelling a new arms race amongst major economies like the US, Russia and China.

The rest of the countries are also swept up in this as governments, including ours, feel increasingly pressured to ramp up defence spending to keep up with the big boys.

Austal looks like a good way to gain leverage to this thematic.