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Not for the faint-hearted: two ASX stocks that win from defence spend
The war in Ukraine has no doubt sent vibrations through the Australian market however there are a handful of companies that may see their profits boosted during a conflict. The rule of thumb is; global equities remain under pressure in the lead up to a conflict as uncertainty and weakening sentiment creep in. Once heightened uncertainty from a protracted war is dispelled, investors return to equity markets
The Australian government has increased defence spending as a key to help protect and defend its borders. More defence spending provides a good opportunity for some ASX listed companies that provide military equipment and services. Here are two stocks that could benefit from a surge in spending.
Austal (ASX:ASB) – A stock that often flies under the radar is shipbuilder Austal. The company is headquartered in San Diego US. According to the company website, since 1988, Austal has designed and constructed over 340 vessels for over 121 commercial and defence operators in 59 countries worldwide, gaining an enviable reputation for innovative shipbuilding using advanced technologies. It is, however, more well known for developing the Littoral Combat Ship in the US Navy.
To highlight just how important Austal is to the US defence force, Austal announced in late June the provision of US$50 million in funding from the US government. This is to maintain, protect, and expand US domestic production of steel shipbuilding capabilities for capital projects over the next 24 months. It also has a forward order book of $4.9bn.
- Citi have a Buy recommendation with a target price of $2.35. Austal posted a better than expected first half net profit. The broker believes Austal will be able to replenish its order book with a number of shipbuilding programs expected to be awarded in the second half.
- Macquarie have an Outperform recommendation with a target price of $2.70. The broker says its recent result was in line with expectations and US shipbuilding is progressing strongly. Macquarie says, “still, the company’s strong performance in the LCS and EPF programs should provide a competitive position for tenders. Contract wins remain the key catalyst.”
Electro-Optic Systems (ASX:EOS) – Aerospace company is involved with defence systems in space. According to the company website, EOS offers a family of fully stabilised remotely operated weapon stations that can be integrated on various vehicle platforms and used for different mission profiles. Our Remote Weapon Systems ensure full weapon readiness while the crew operate the system protected within the vehicle. All are designed with a high level of commonality and modularity to offer clients a flexible firepower solution.
Headquartered in Canberra, the company has two manufacturing facilities in Australia and one in Huntsville, Alabama. EOS also has integration and sustainment centres located in Singapore and Abu Dhabi. Back in 1991, the US Army contracted EOS to develop a laser-based, battery-powered fire control unit for direct and indirect fire weapon systems. EOS was able to use its sensors and lasers as well as cutting edge technology to developed the world’s first RWS (Remotely Operated Weapon System).
The company is currently working on SpaceLink. The opportunity remains very attractive, and the company has invested $37m in SpaceLink during 2021 to accelerate engineering and business development. It was awarded a contract to demonstrate the technology on International Space Station (ISS).
EOS says it is well-positioned to support allies currently under intense national security pressure.
- Citi have a Neutral recommendation with a target price of $2.23. The broker sees many reasons to become excited but for the moment its sitting on the sidelines and waiting until can replenish its declining backlog before turning more positive.
