enigma

Hi Disco Stu,

I am sorry to read you "just gave up" and have jumped ship because in my view the future for Austal is buoyant. I must admit I am fed up with the drowning share price so I thought I would give an update to my post "risk and return" written in April this year. I hope you get back on board.

As expected the 11/12 profit was dismal but in the USA there was a significant turn around in the second half. The large cost overruns (I guess around $20m) on JHSV1 and (to a lesser extent) JHSV2 are under control and will soon be gone. JHSV's 3 to 10 are expected to give a decent return as lessons are learnt and the new manufacturing facility increases efficiency. The more important LCS contracts are returning an ok EBIT and for the current financial year I am looking forward to a big increase in USA revenue, in excess of $700, with an EBIT margin of at least 6%. There will be further gains in revenue in 13/14 as the facility reaches full production and it is safe to assume ongoing increases in margins as productivity increases over time.

At Henderson there will be an end to the large losses as the facility winds up to make the Custom patrol boats. Regretfully this contract has a slow ramp up phase so I am assuming a break-even result for Henderson in 12/13 but a decent profit the next year.

There will be a big improvement in 12/13 in the Service and System division as the start up cost associated with Systems are not repeated. In addition Service will benefit about $2m a year from the Westpac Express ferry charter to the USA Navy. Also, there is potential in the Service division for a massive improvement in future years as Austal builds its worldwide platform to service the LCS's and JVSV's. I consider Austal to be in the box seat to win all or most of this contract when it is awarded by the USA Navy.

The commercial ferry market remains in the doldrums but I am sure the Philippine yard will turn in a nice little profit in 12/13. I am expecting revenues of $40 million at 10% EBIT margin. When the commercial ferry market does recover, as it must, in my view this yard will be a big winner.

I believe it is significant Austal, in April this year, added an extra senior person to its sales offices in the United Arab Emirates. I understand there are 3 real, live opportunities to sell patrol boats and multi purpose vessels to Navies in the Middle East. These potential contracts could be very large, up to $1 billion.

The enigma remains - if investors in Austal can look forward to significant rising profits in future years why is the share price so weak. I put this down to 3 reasons.

1. The fear of automatic large defense budget cuts in the USA on 1st January 2013 if the President and Congress fail to agree a budget.
2. Loss of confidence in Austal management due to poor performance in recent years.
3. General lack of awareness in the market about Austal.

The above 3 points do not concern me but rather cause me to look upon the current share price as a great buying opportunity. Keeping with the nautical theme in this post, I quote Bill Shakespeare "There is a tide in the affairs of men ...." (Julius Caesar, Act 4, scene 3). I believe the tide is gentle turning for Austal and I am confident of a soon developing multi-year up move in its share price as each half year profit exceeds the previous. I know nobody rings a bell at market bottom but I hear a ringing in my head and it is not Tinnitus.