Over the previous five years, there has been notable growth in the defense industry. The Federal Government provides the majority of the funding for this public sector industry, which serves Australian citizens. The Royal Australian Air Force (RAAF), the Royal Australian Navy (RAN), and the Australian Army make up the three branches that make up the Australian Defense Force (ADF). The ultimate purpose of these branches is to provide national security through their involvement in humanitarian aid, peacekeeping operations, and combat warfare. Australia's defense market is divided into categories such as anti-air missiles, frigates, multirole aircraft, and HALE. The largest segment of the Australian defense market is made up of multi-role aircraft, followed by frigates.
According to the Industry Research Report, Australia's defense industry is the 32nd largest in the country and ranks third in terms of market size among the public administration and safety industries. It grew at an average annual rate of 2.0% between 2017 and 2022. Through 2022–2026, the market is anticipated to expand at a compound annual growth rate (CAGR) of more than 5%.
Defence has been one of the priority areas of focus under MMS (Modern Manufacturing Strategy). As per the recent budget for 2022-2023, the Australian government budget sets out the investments to boost the Defence budget by approximately above 2% of GDP, which will not only support Australia’s sovereign Defence industry but also improve the lives of Defence Force members, veterans, and their families. ( Reference: Australian Government/Australian Trade and Investment Commission )
Let’s check out the five best ASX defensive companies for 2024 listed on the Australian stock exchange (ASX). These are as follows:
Note: The market cap and the share price of the selected ASX companies below are mentioned as of 19 January 2024.
Elsight Limited (ASX: ELS)
Market cap: $57.12 million
CMP: $0.38
• Elsight owns unique software and hardware solutions that have allowed it to maintain a technological edge in a significantly expanding unmanned aerial vehicle (UAV) and drone market. The recently received Type Certificate by the U.S. Federal Aviation Administration (FAA) for the Halo-enabled Airobotics Optimus-1 EX system stands to allow flight operations over people and infrastructure.
• The company’s anticipated and ongoing growth remains entirely organic, as the sales costs and efforts also remain minimal, posing little financial risk, with the same being further downplayed by healthy cash balances, which make up a substantial portion of the company’s asset base and book value.
Austal Limited (ASX: ASB)
Market cap: $691.36 million
CMP: $1.908
Austal is actively pursuing new opportunities, with the capacity to handle additional awards. Plans include T-AGOS and OPC ships for the US Coast Guard. Austal USA is transitioning to new steel shipbuilding projects, anticipating improved margins. The support business aims for $500 million in annual revenue by FY2027, benefiting from major steel awards. A contract for fully funded Emergency Medical Ships (EMS) is expected in H1 FY2024. Austal's proposal for Landing Craft Utility (Class 1700) is also imminent. The company's expertise in autonomous vessels aligns with future opportunities from the AUKUS agreement. FY2024 targets include 8–10% revenue growth and a 3-4% underlying EBIT margin.
Droneshield Limited (ASX: DRO)
Market cap: $238.47 million
CMP: $0.39
As part of a $20 million military aid package to Ukraine, the Australian government has given the company multiple orders totaling $10.4 million to Droneshield. For the quarter ending in December 2023, the company reported grants and cash receipts from customers totaling $48 million. The company maintains its position as the world leader in the Counter-UAS ("C-UAS") market with DroneShield and its solutions, which are still developing. The business is in a unique position to benefit from the rising demand for C-UAS solutions. It is anticipated that the United States will remain the largest market for DroneShield, with a growing clientele comprised of various federal agencies, both military and non-military.
Electro Optic Systems Holdings Limited (ASX: EOS)
Market cap: $178.09 million
CMP: $1.04
EOS Defence Systems has secured a new contract worth approximately $28 million to supply spare parts for R600 Remote Weapon System ("RWS") units to a customer in Southeast Asia. According to the contract, deliveries must begin in late 2024 and run through 2025 and 2026. One well-known product that has profited from continuous innovation and development is the R600. It was initially made for a Southeast Asian client. In comparison to its rivals, the EOS RWS product line offers the most firepower for the least amount of weight, as well as better accuracy and dependability.
Adacel Technologies Limited (ASX: ADA)
Market cap: $57.93 million
CMP: $0.76
The Federal Aviation Administration (FAA) has awarded Adacel Technologies a five-year, USD$59 million contract that is expected to greatly increase the company's revenue and solidify its knowledge of maintaining and modernizing essential Tower Simulation Systems (TSS). This success not only guarantees revenue stability but also establishes Adacel as a dependable supplier of vital aviation services, opening the door for further expansion and enhancing its standing in the sector.
The company is confident in increased profitability, as seen by its high expectations for EBITDA for the upcoming fiscal year 2024, which range from USD 5.0 million to USD 5.25 million. Furthermore, Adacel projects a profit before tax (PBT) of US$3.0 million to US$3.25 million, demonstrating its dedication to attaining strong and stable financial results.
Reference: *All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters
Frequently Asked Questions (F.A.Q)
What are the top 5 ASX defense stocks?
• Elsight Limited (ASX: ELS)
• Austal Limited (ASX:ASB)
• Droneshield Limited (ASX: DRO)
• Electro Optic Systems Holdings Limited (ASX: EOS)
• Adacel Technologies Limited (ASX:ADA)
What are the fundamentals of Electro Optic Systems Holdings Limited?
Over the last five years (FY2018 to FY2022), the revenue has grown at a compound annual growth rate of about 8.03%. The revenue has been growing consistently year over year. The DSCR profile has been kept up to date so that lenders can receive services on time. The gross profit margin results for the previous year’s show well-accounted financial performance delivery with gloss-level efficient cost optimization, with an average growth rate of about 38.7% over the course of five years. On September 20, 2023, EOS's cash balance was $46.1 million, up $4.1 million from June 30, 2023, when it was $42.0 million, following the repayment of $26.9 million in debt facilities. Price-to-book ratios of 0.75x and 1.28x, respectively, strongly imply that a company is offering its stock at a fair price.
What is the outlook of the Australian defense industry?
Over the previous five years, there has been notable growth in the defense industry. The Federal Government provides the majority of the funding for this public sector industry, which serves Australian citizens. According to the Industry Research Report, Australia's defense industry is the 32nd largest in the country and ranks third in terms of market size among the public administration and safety industries. It grew at an average annual rate of 2.0% between 2017 and 2022. Through 2022–2026, the market is anticipated to expand at a compound annual growth rate (CAGR) of more than 5%.
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