Enhanced Sector Focus Stimulating ASX Defence Stocks

Team Veye | 15-Nov-2024

Global trends and especially Australia are indicating increased  spending on defence. More funding and budget provisions on the sector are hinting at growth opportunities of defence companies. Two best growth stocks to buy now and ready to reap this advantage are

Austal Limited (ASX: ASB)

Austal Limited (ASX: ASB) has navigated a significant transition phase over the past three years, spurred by the conclusion of the Littoral Combat Ship (LCS) program, and is now positioned for an execution and growth cycle. The underlying business has shown resilience, with a strategic pivot towards expanding its steel production capabilities. Increased capital expenditure in FY25 and FY26 will enhance steel assembly, launch, and recovery infrastructure, with specific funding plans expected soon after resolving outstanding issues with the Department of Justice.

A standout performer within Austal is its support segment, which has surpassed expectations. Originally targeting $500 million in revenue by FY2027, this division reached $468 million in FY2024, even with additional contributions expected from the San Diego yard as it fully comes online in FY26. Furthermore, Austal is among high growth stocks because its participation in the AUKUS pact has unlocked new growth avenues under Pillar 1 through submarine module production and will likely see further benefits from Pillar 2’s technology developments across the US and Australia. While the US remains central to revenue and profitability, Austal’s Australian operations are being strategically positioned for long-term success. The firm’s Heads of Agreement with the Commonwealth of Australia, if finalized, could make Austal the preferred shipbuilder for a multi-decade, $20 billion+ vessel program, including Capes, various Landing Craft models, and possibly General Purpose Frigates. This would parallel its success in the US defense industrial base, where Austal is not only constructing vessels but also supplying submarine modules to the US Navy.

Financially, FY24 marked a turnaround for Austal, swinging from a $4.8 million EBIT loss in FY23 to a $56.5 million profit, despite a challenging year for the Australasian segment. The $22 million EBIT loss there was offset by a strong $93 million EBIT contribution from the US, driven by a record order book with new programs, including the EMS and LCU awards. Australasian operations are also expected to stabilize with recent orders in Asia and new defense programs. Looking ahead, Austal’s robust $12.7 billion order book and promising Strategic Shipbuilding Agreement should fuel growth in both the US and Australia. With ongoing US capex investments, new programs, and anticipated 3,000 additional hires over the next 2–3 years, Austal is on a solid growth trajectory, backed by evolving AUKUS-related opportunities in submarine modules and defense technology.

Electro Optic Systems Holdings Limited (ASX: EOS)

For the quarter ending 30 September 2024, Electro Optic Systems Holdings Limited (ASX: EOS) delivered strong performance, particularly in its core business areas of Remote Weapon Systems (RWS), counter-drone technology, and space solutions. The company completed manufacturing and delivery of RWS units for both long-standing Middle Eastern and domestic Australian customers, and continued to reduce its Contract Asset working capital to $79.1 million. EOS also delivered its Slinger Counter Drone systems to a key customer in Germany and secured a new, strategic RWS customer in the Middle East for vehicle testing. In terms of customer orders, EOS Space Technologies secured $9 million worth of work in Australia, and EM Solutions won $15 million in new orders, expanding its European market presence. The company continues to develop its order book, with advanced negotiations ongoing for the Land 400 Phase 3 RWS opportunity in Australia, worth up to A$100 million.

EOS reported a strong cash position at the end of Q3 2024, with cash reserves growing to $55.0 million, up from $52.2 million at the end of June 2024. The company’s revenue growth in the first half of 2024 was impressive, reaching $142.6 million, a 92% increase compared to the same period in the previous year. Underlying EBITDA was positive at $11.5 million, reflecting a strong turnaround from a loss in the prior year. EOS continues to focus on reducing debt and strengthening its financial position, with working capital facilities being repaid and new contracts contributing to sustained cash inflows.

EOS remains optimistic about its growth prospects, driven by supportive geopolitical conditions, particularly in counter-drone technologies, and its expanding customer base in Europe and the US. The company highlighted the growing global demand for drones and counter-drone solutions, as well as the strategic importance of space control technologies. EOS continues to pursue innovation, particularly in directed energy solutions like high-energy laser weapons and space capabilities. With ongoing negotiations for new contracts, including a potential $30 million order in North America and continued opportunities in Ukraine, EOS is focused on diversifying its customer base, growing its order book, and expanding its market share, especially in Europe. The company is also exploring third-party funding for strategic growth, with a particular focus on advancing its laser and space technologies.

Source: Company’s Report

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