After posting a near-record profit the head of WA-based shipbuilder Austal has revealed why the company walked away from the $3.5 billion offshore patrol vessel build program for the Royal Australian Navy.
Austal more than doubled its net profit last year to $39 million, driven largely by better than expected growth from US defence contracts.
Things weren’t so rosy at its Australian shipyard in Henderson just south of Perth, which posted a $6.7 million loss despite revenue increasing from $113.7 million to $198.5 million.
It was a turbulent year for the shipbuilder’s Australian operations.
The company's bid to build the offshore patrol vessels was rejected by the federal government in November 2017, but they were selected to help build the winning design with competitor Civmec and German shipbuilder Luerssen's.
The announcement that the three companies would work together surprised the defence industry given Austal and Civmec were direct competitors.
Negotiations between the companies failed in May and Luerssen announced Austal would not be a part of the build but gave no further details on what went wrong.
Austal chief executive David Singleton revealed they were the ones to walk away from the contract, and had done so in the best interest of their shareholders.
“We made our decision on our involvement in that program on purely commercial grounds, that is, is this a good deal with the right level of risk for our shareholders?” he said.
“I can tell you that there was never really a time when we thought it was a positive deal for our shareholders and we’re certainly not going to get involved in risky long term programs without the right commercial and financial structures in place.
“I still believe the decision that we made around that program with Luerssen was exactly the right one and we walked away from that with no regrets whatsoever.”
He said had Austal's original bid as the only shipbuilder been selected it would have created a strong and stable base for the company’s Henderson operations but they still had a strong commercial order book, which put them in a good position until at least 2021.
“It would have created an underpinning to our commercial business going forward in WA. We always said that our program was important for that,” he said.
“OPV was never about what happens in the next year or two. It was always about what might happen in the next five to 10 years. When you take that certainty away then it’s always going to raise questions.
“If the commercial market keeps strong and positive as it is then we should be good.”
Mr Singleton said Austal’s Australian operations had faced a couple of headwinds throughout the year but they expected to turn a profit this year and going forward.
“There are a number of factors in WA, first of all we did tell the market two years ago that the Guardian Class Patrol Boat that we’re building for the Commonwealth, we wouldn’t take profit on that until first of class was delivered. The first of class is going through sea trials at the moment,” he said.
“So that’s just conservatism in the way that we account.”
With a combined orderbook of 10 Littoral Combat Ships and Expeditionary Fast Transport vessels for the US Navy Mr Singleton said Austal’s US business and shipyard was the, “absolute cornerstone of what’s going to be a strong business for many years to come.”
“We used our own money to build a next generation shipyard in the United States. It’s performing brilliantly. It’s undoubtedly the most efficient shipyard in the US,” he said.
“It’s a new generation of vessels for them built in a new generation yard and I think that’s what made us such a highly differentiated business in the shipbuilding industry.
“Not only are we going to see those benefits in the US but we’re getting the knock on benefits overseas. People look at Austal and they say, 'well you guys build ships for the US navy so you must be good'.”
Austal’s (ASX:ASB) share price was trading marginally higher at $1.75.
Hamish Hastie is a Fairfax Media business reporter writing from the WAtoday offices in Perth. He was raised in Armadale in Perth's south east and covered the area for four years at the Examiner Newspaper before a stretch writing for the Chamber of Commerce and Industry WA's business magazines.