Austal (ASX: ASB) Secures A$1bn Defence Win: A Defensive Buy at 28x Earnings?

Austal (ASX: ASB) locked in more than A$1.16 billion in new contracts last week, cementing its position as Australia’s go-to defence shipbuilder. The centrepiece is a A$1.029 billion deal to design and build 18 Landing Craft Medium vessels for the Australian Army. This was followed by a contract valued at over A$135 million for two more Evolved Cape-class Patrol Boats for the Australian Border Force.

With shares trading around A$6.60 after surging more than 120% over the past year, the key question for investors is simple: Does this contract win justify the current price, or is most of the good news already priced in?

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Austal Becomes Australia’s Strategic Shipbuilder

The Landing Craft Medium contract matters because it is the first vessel program under the Strategic Shipbuilding Agreement signed with the government in late August 2025. This deal makes Austal the nation’s chosen builder for major naval programs, creating a decade-long pipeline of guaranteed work.

Building starts in 2026 at Austal’s Henderson shipyard in Western Australia. All 18 vessels should be delivered by 2032, each able to carry loads up to 80 tonnes for Army operations. Even better, another contract for eight Landing Craft Heavy vessels is expected before year-end, adding more certainty to an order book already worth more than A$13 billion.

For investors, this creates something rare on the ASX: genuine earnings visibility. Unlike one-off deals that cause lumpy revenue, sovereign shipbuilding agreements provide steady, multi-year income. This should help margins improve as Austal ramps up production.

Hanwha Takes Largest Shareholder Position

On 12 December, the Australian government allowed South Korea’s Hanwha to lift its stake from 9.9% to 19.9%. This makes Hanwha the company’s biggest single shareholder, though strict rules limit its access to sensitive information and any board appointments.

This creates both opportunity and risk. On the one hand, Hanwha brings deep shipbuilding expertise and global capital that could accelerate Austal’s growth. The Korean giant already supplies armoured vehicles to the Australian military and bought Philly Shipyard in the US last year.

On the other hand, Japan has raised concerns about protecting technology secrets. Austal will build eight Japanese-designed Mogami-class frigates, and Tokyo worries about information leaking through Hanwha’s larger presence. Whether this causes problems remains unclear, but the government has stressed that Hanwha stays a minority investor with no path beyond 19.9%.

The Investor’s Takeaway for Austal

Austal delivered record results in FY25, with revenue of A$1.8 billion and EBIT of A$113 million. Management expects EBIT to hit A$135 million in FY26, another record. The balance sheet looks solid too, with A$584 million in cash against A$267 million in debt.

The issue for new buyers is valuation. Trading at a trailing P/E ratio of approximately 28x earnings after more than doubling in 12 months, Austal is not cheap. Shares have pulled back about 23% from the October high of A$8.60, indicating that some investors are booking profits after the strong run.

We believe Austal remains a quality business with excellent earnings visibility. The sovereign shipbuilder status and A$13 billion order book offer a level of certainty that is hard to find among ASX industrial stocks. However, patient investors may get better entry points if weakness continues. For those already holding, the long-term story stays strong, but near-term gains may be limited given the stretched valuation.