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Drone tech to space, these ASX stocks set to benefit from Defence Strategic review

Australia’s Defence Strategic Review is huge news for ASX stocks working to keep our nation safe on the battlefield, seas and even in space.

Several ASX companies are positioned to help improve Australia's defence capabilities. Picture for illustration purposes only. Picture: Getty Images
Several ASX companies are positioned to help improve Australia's defence capabilities. Picture for illustration purposes only. Picture: Getty Images

The Defence Strategic Review is being touted as Australia’s most significant report of its kind since World War II. And it offers a huge opportunity for ASX defence stocks.

With six priority areas it is expected to shape the country’s defence policy and national security posture for decades to come.

While the exact costs of implementing recommendations in the review have not been released, it is expected spending on defence will rise from the current (around ) 2 per cent of GDP equating to about $49 billion annually.


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Also in a positive sign, the federal government has made a commitment to work with Aussie industry as it works to improve the country’s defence capabilities. So which ASX stocks could benefit?

READ: Spotlight on ASX defence stocks following Australia’s most significant defence review since WWII

Modern warfare - Robotics and drone tech

Since Russia invaded Ukraine in February 2022, images of warfare have much resembled past wars including tanks, warships, fighter planes, guns, grenades and boots on the ground.

But as Professor of Anthropology at San José State University Roberto J. González pointed out, there’s another side to the conflict.

He described it a “hypermodern battleground where drones play a crucial role in surveillance, reconnaissance and combat missions”.

“These technologies may foreshadow a world in which armed conflicts are conducted largely by remote control – and perhaps someday, by artificial intelligence,” he said.

There are several Australian ASX companies operating in the unmanned aircraft or drone space.


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DRONESHIELD (ASX:DRO)

DRO has AI based platforms for protection against advanced threats such as drones and autonomous systems.  The market for counter-drone tech is expanding rapidly and projected to be worth $US3.8 billion by 2027 with a CAGR of around 28 per cent, driven by rising international tensions and security breaches.

DRO has several contracts with police and military customers in Australia and New Zealand, the European Union, and US and with civilian and airport agencies.

Bell Direct market analyst Grady Wulff told Stockhead DRO had been going from “strength-to-strength” in recent times following the announcements of key contracts being won including two $11 million deals in December 2022 and January 2023.

“From a results perspective, CY22 was a pivotal year for DRO, with the company closing in on profitability, reporting a significant improvement in cash, lower-than-expected operating expenses and revenue driven by a record order backlog of $24 million in cash receipts,” she said.

Wulff said the Defence Strategic Review placed DRO in a prime position to further enhance its footprint as a provider of key assets for the ADF,  in particular due to the second of the six priority areas, which is to develop the ADF’s long-range strike capability and the domestic manufacture of munitions.


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ELSIGHT (ASX:ELS)

Elsight has developed the Halo drone communication technology system enabling unmanned aircraft to fly beyond the visual line of sight (BVOS).

ELS’s platform was designed to address the demanding requirements of special forces across enemy lines and sophisticated intelligence organisations.

The company has a range of customers from defence and homeland security forces to industrial security, broadcasting, first-responders, healthcare and retail.

XTEK (ASX:XTE)

This is a defence industry company operating as two distinct divisions - ballistics and technology. The ballistics division is based on its “HighCom Armor” brand and is focused on designing, manufacturing and supplying global military, law enforcement and first-responder customers with personal protection ballistic products.

XTE’s cutting-edge military tech division supplies UAV (unmanned aerial vehicle) and UGV (unmanned ground vehicle) solutions, detection and optical payloads, 3D mapping and modelling software, along with tactical situation awareness software.

XTE counts the the Australian Defence Force among its customers.

Wulff said this was another company that could be in line to benefit from the Defence Strategic Review.

“The review places XTE in the prime position to work with the ADF to achieve the key point in the review of lifting capacity to introduce disruptive new tech into ADF capability, in close partnership with Australian industry, given XTE’s existing infrastructure and operational capacity,” she said.

She said the H1 FY23 for XTE had delivered very strong results compared to the prior-corresponding-period (PCP). Revenue exceeded Bell Potter guidance at $48.5 million, up 321 per cent on PCP.

“The company has also recently experienced gross margin improvement, up 27.1 per cent on the PCP, as revenue in the first half was largely driven by higher margin sales in the ballistics division,” she said.

“Given XTEK’s existing contract with the ADF for $26.9 million to supply an unspecified amount of small unmanned aerial systems (SUAS), the strategic review now opens further doors for contracts to be extended and new orders to be placed.”

Military equipment positions for growth

AUSTAL (ASX:ASB)

The shipbuilding opearation is among the most established ASX companies operating in the defence sector.

ASB operates ship yards in five countries including Australia, China, Philippines, the US and Vietnam and counts Andrew Forrest as a substantial shareholder, with a 19 per cent stake.

ASB hasn’t been without its controversies, divulging in April that former execs based in the US had been accused of and charged with manipulating financial information.

“The United States Department of Justice (DOJ) has indicted three former Austal USA employees for allegedly making or causing to be made false and misleading statements about Austal USA’s performance and financial condition between 2012 and 2016, and the US SEC also announced that it has filed civil charges against the same three individuals,” said an announcement said.

BRAINCHIP HOLDINGS (ASX:BRN)

This is a smart sensor analytics company which has products covering several markets, including video analytics, speech and speaker recognition.

BRN’s tech can also be applied to autonomous vehicles and unmanned aerial surveillance drones.

MICRO-X (ASX:MX1)

A leader in cold cathode X-ray technology, Micro-X produces a range portable X-ray systems, most commonly used in healthcare applications such as aged care homes and military or humanitarian field hospitals.

But apart from the medical sphere, MX1 is also looking to commercially launch its bomb detection Argus X-ray camera in the next couple of months.

BISALLOY STEEL GROUP (ASX:BIS)

BIS produces different types of steel including armour plate for Australia’s ballistics, defence, naval, vehicles market and for overseas customers.

BIS says it is Australia’s only processor of quenched and tempered high strength, abrasion resistant and armour grade alloyed steel plates.

BISALLOY ARMOUR  steel is used to support Australia’s defence forces while BISALLOY PROTECTION steel has been designed to protect “life, valuables and property”.

ELECTRO OPTIC SYSTEMS (ASX:EOS)

This aerospace company is involved in space defence. The company’s defence systems include laser physics, advanced optics, precision control systems, space domain sensors and communications technologies, and remote operated combat vehicles.

EOS earlier this month announced it had won a contract with SpetsTechnoExport (STE), a Ukrainian state-owned foreign trade enterprise, to supply up to 100 EOS heavy RWS units to the embattled nation, including spares and related services.

The contract, worth around $120 million over 2023-24, is conditional on demonstration testing over the coming weeks, and subject to other customary terms for military contracts.

Nevertheless, investors seem confident with its share price up around 40 per cent in the past month.

Are we missing any stocks in this story? email nadine.mcgrath@stockhead.com.au

This content first appeared on stockhead.com.au

At Stockhead, we tell it like it is. While Elsight, is a Stockhead advertiser, it did not sponsor this article.  The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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Original URL: https://www.theaustralian.com.au/business/stockhead/drone-tech-to-space-these-asx-stocks-set-to-benefit-from-defence-strategic-review/news-story/50ad7e7ebf432617aae218ba27089189