Shipbuilder Austal eyes 'dramatic growth' in Asian naval forces

ASX-listed shipbuilder Austal's boss David Singleton says the concerted push by Asian nations to boost their naval forces over the next decade could generate a steady pipeline of work for the company.

In an interview with The Age and the Herald Mr Singleton said the ongoing tensions in the South China Sea have prompted regional players, including Japan, South Korea, The Philippines and Indonesia, to consider beefing up their naval capabilities.

"We’re all familiar with the geopolitics that's playing out in Asia and the South China Sea, and overlapping claims on islands and sea, and fishing grounds and all that sort of thing that's going on. And that's creating a change in the military posture of those countries.

"And that's a really important change for us, because instead of us thinking about naval programs say in the Middle East, which are heavily contested by overseas and European companies, we're seeing what I think is going to be dramatic growth in the build programs for naval ships in Asia," he said.

Capitalising on this demand for new naval vessels from the region would help cushion the blow the Perth-based shipbuilder suffered last week when a US Navy contract, potentially worth up to $8.5 billion, was awarded to a competitor.

A Littoral combat ship built by Austal for the US Navy.

The US Navy decision overshadowed a separate announcement on the same day that Austal had won a $324 million contract to build Australian Navy patrol boats, which ironically is the most valuable Australian contract it has won to date.

Austal has invested heavily in Asia in recent years to establish its own shipyards in Vietnam and The Philippines. It also has shipyards in Australia, the US and a small joint venture in China.

Austal is also hoping to get the nod to build the first six of 18 offshore patrol boats for The Philippines, a project worth about $950 million. There is also speculation that Austal could buy a commercial shipyard at Subic Bay in The Philippines, which would further boost its capability.

Mr Singleton believes the company's enhanced Asian presence now puts it on a better footing to compete for contracts in the region.

"Because we've invested heavily in naval shipyards in Asia, we're now much more familiar with how to build in Asia, what it costs and how to be really competitive," he said.

Despite the potential Asian opportunities ahead, missing out on the US contract raises questions about where the future work for its Alabama shipyards will come from.

The US contract news shook the company's stock price and it fell 19.9 per cent on the day as investors placed more weight on the US miss than the Australian success.

But Mr Singleton said Austal's US operations still had years of contracted work ahead, adding that there were many small and medium-sized US contracts that the company could bid for.

In a note to clients after the contract news Hartleys analyst Oliver Stevens lowered his target price on Austal from $3.90 to $3.20, but kept a buy rating.

"We see Austal's order book well placed to deliver earnings at around current levels out to financial year 2022. While the commercial ferry market is likely to be subdued in a post-COVID-19 world, the outlook for US defence spending remains strong which should provide Austal with opportunities," he said.