Analysis and Commentary

Danger time for Australia’s young defence SME manufacturers

Analysis and Commentary

By Peter Roberts

The story on the stock market this year has been a bloodbath in the share price performance of Australia’s small coterie of high technology manufacturers.

The worst month was June, when the the ASX 200 share index lost 8.9 percent of its value and the S&P/ASX All Technology Index went backwards by 10.3 per cent.

True, other stock markets have seen similar punishment meted out on technology stocks – the US NASDAQ was down 22.4 percent in the second quarter, its worst quarterly performance since 2008.

My concern today is the tiny number of Australian owned and led defence manufacturers.

Governments of both colours have told us for years that growing these companies so they can build a genuinely sovereign Australian defence capability is a high priority.

But after shares fell sharply this year, and especially after the sharemarket bloodbath in June, the stars have lined up for foreign companies to move in and snap up a bargain.

In June alone, shipbuilder Austal fell nine percent, HF radio manufacturer Codan fell 12 percent, drone countermeasure manufacturer Droneshield fell 16 percent, Electro Optic systems fell 20 percent, drone engine manufacturer Orbital Corp fell 22 percent, composites manufacturer Quickstep 18 percent, and autonomous systems developer Strategic Elements fell 18 percent.

Consider in more detail Perth shipbuilder Austal whose shares have fallen steadily from $4.37 in February 2020 to a low of $1.80 on Friday.

The shares fell even as the company continued to make profits on the back of its shipbuilding contracts for the US Navy, and even as the company opened a $100 million steel-vessel shipyard at Mobile, Alabama. The new yard was bankrolled by the US defence department to the tune of $50 million.

During this time it must be said dividend payout had fallen from a high of 0.05 cents a share to 0.04 cents.

It has been only in July that Austal was rediscovered by investors, after it won a $4.35 billion contract for the detail design and construction of up to 11 Offshore Patrol Cutters for the United States Coast Guard (USCG).

Austal has always been profitable, and its’ promise has been obvious for all to see.

Yet even after a rally this month, some foreign company could snare Austal for only $926 million.

Electro Optic Systems is another crucial Australian high tech manufacturer, yet it is valued today at a tiny $133.2 million..

The company’s core business manufacturing remote weapons stations is profitable, an area where it is busy working on RWS contracts for armoured vehicles worth as much as $450 million.

EOS has lost money over the past two years – the result of heavy investment in the business as it expanded into space and communications sectors, and of Covid disruptions to its mainly international supply chains.

The company now faces heavy demands for capital, forcing a strategy review.

But even so, EOS, just like Austal, is exactly the sort of company Australia should not allow to be given away to foreign owners at a bargain price – leaders in their fields, and Australian owned and led.

The potential for a string of takeovers of our most promising firms is a familiar story for Australia.

Stock markets rise and fall and those with deep pockets need only wait to pick up local technologies cheap.

But if we are ever going to build sovereign defence industry capability, we simply cannot let these companies fall to foreign predators.

Picture: Electro Optic Systems has $450 million in contracts for remote weapons stations

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