Australian manufacturing has been in the news lately, and much of it has been negative, with manufacturing’s share of the nation’s Gross Domestic Product (GDP) continuing to decline – from 6.8% to 5% over the last decade, down from more than 14% in 1995.
The manufacturing share of total Australian jobs has declined from about 10% two decades ago to 6% by 2018.
On the Australian Securities Exchange (ASX), there is a dearth of manufacturers – but it is still possible to find manufacturers that are prospering.
Here are three such prospects.
- Big River Industries (BRI, $1.73)
Market capitalisation: $145 million
12-month total return: –24.9%
3-year total return: 8.9% a year
Forecast FY25 dividend yield: 6.9% fully franked (grossed-up, 9.8%)
Analysts’ consensus price target: $2.34 (Stock Doctor/Refinitiv, two analysts)
Timber and building products manufacturer and distributor Big River Industries was a rare manufacturing float when it came to the ASX in May 2017. A vertically integrated manufacturer and distributor of timber, wood panels and wood and steel building materials, Big River operates as a kind of Bunnings for the nation’s builders and tradies.
The company has six manufacturing sites across the country and one in New Zealand, and 26 sales and distribution centres. About 20% of Big River’s revenue comes from its own manufacturing operations, with 20% directly imported and 60% sourced from local supply partners.
Big River is well-diversified by geography, industry segment, construction type and customers. The detached housing market is its largest, accounting for 40% of revenue, with 23% coming from commercial construction, 17% from multi-residential building, 8% from alterations and additions, 6% from civil construction and 6% from re-manufacturing products from original manufacturers.
Geographically, 92% of revenue comes from Australia – spread across the two largest markets, Queensland, and Victoria (both 26%), New South Wales/ACT (23%), South Australia and Western Australia 17%, with 7% coming from New Zealand.
In FY23, Big River lifted revenue by 9.8%, to $449.5 million, with underlying net profit rising 3.6%, to $23.3 million. The full-year dividend increased by 10.3%, to 17.1 cents, fully franked. Then, in the half-year to 30 December 2023, results came under pressure from lower residential building activity and the prevailing inflationary macro- economic environment, with revenue rising by just under 1%, to $218.8 million, and net profit slipping 47.3%, to $6.9 million. The interim dividend was cut by 36%, to 5.5 cents.
In its half-year report, Big River told investors that its short to medium-term commercial projects pipeline remained strong, given delays caused by site, labour, and weather issues, while it expects the housing market to be soft in calendar-year 2024, with rebound expected in 12 months on high demand. While housing approvals have been in decline, Big River said the medium-term was looking positive, given reduced inflation, plateauing of interest rates, elevated migration levels, low vacancy rates and high housing demand.
Analysts are expecting a 40%-plus fall in earnings per share (EPS) for Big River in the current financial year, with a recovery of about 25% in FY25. With an eye on FY25, the analysts that follow Big River are bullish.
- Austal (ASB, $2.31)
Market capitalisation: $837 million
12-month total return: 41.9%
Three-year total return: 0.7% a year
Estimated FY25 yield: 1.3%, unfranked
Analysts’ consensus valuation: $2.85 (Stock Doctor/Refinitiv, three analysts)
Perth-based shipbuilder Austal has come a long way from building aluminium crayfishing boats in 1987, to being a global leader in aluminium shipbuilding, manufacturing a broad range of ferries, offshore work vessels, patrol boats and warships. Austal is Australia’s largest defence exporter, and operates five shipyards in four countries – Australia, the US, Philippines, and Vietnam – as well as eight service centres in four countries, Australia, the US, Singapore and Trinidad and Tobago.
The company has built more than 260 commercial and defence vessels for more than 100 customers in 50 countries. As at December 2023, Austal had 43 vessels under construction or scheduled, 60 vessels under sustainment contracts, and an order book of $12.7 billion.
In particular, Austal has grown into a major supplier to the US Navy: it is the only foreign-owned prime contractor designing, building and sustaining ships for the US Navy and Coast Guard. The company’s shipyard in Alabama is currently contracted on 11 different vessel programs for the US Navy. The two main classes are the 19 Littoral Combat Ships (LCS), for the US Navy, of which 18 have been delivered; and the 16 Spearhead-class expeditionary fast transport (EPF) vessels, of which 14 have been delivered. On completion of these two contracts alone, Austal will have built 15% of the US Navy surface fleet.
While the Alabama shipyard is the company’s largest, the home base at Henderson in Western Australia is also a major operation, employing 600 people. It is the home of the Cape-class Patrol Boat (CCPB) and High-Speed Support Vessel (HSSV) programs. The Cape class comprises 22 large patrol boats operated by the Royal Australian Navy, the Australian Border Force and the Trinidad and Tobago Coast Guard. Austal Australia is also contracted to deliver 22 steel-hulled Guardian-class Patrol Boats to the Commonwealth of Australia under the Pacific Patrol Boat Replacement Project; these boats are being given to Australia’s Pacific neighbour countries, such as Micronesia, Tonga, and Fiji. Austal has delivered 18 Guardian-class vessels since 2018.
In November last year, Austal signed a Strategic Shipbuilding Agreement with the federal government, under which the company was appointed as the Commonwealth’s strategic partner for vessels to be built in Western Australia. In announcing the SSA, the Department of Defence stated that “a sovereign and enduring naval shipbuilding and sustainment industry at Henderson is central to the government’s commitment to ensuring continuous naval shipbuilding in Australia and delivering the capabilities needed to keep Australians safe.” Austal expects to pick up significant work as part of the AUKUS defence pact between Australia, the US, and the United Kingdom.
However, shipbuilding can be a difficult business when particular vessel programs encounter issues; and Austal found this in 2023 when its US$385 million contract to build five Navajo-class towing, salvage, and rescue (T-ATS) ships for the US Navy and Coast Guard ran into problems. The T-ATS ships was an important contract for Austal, because it was the first contract it had received for steel ships, after investing US$100 million in 2020 on a steel manufacturing facility at the Alabama yard, to enable it to simultaneously build both aluminium and steel hulled ships: this facility was opened in 2022.
But in July last year, the company requested a voluntary suspension to announce an estimated FY23 loss of between $69 to $75 million on the T-ATS contract. Two days later, Austal announced that its FY23 guidance for earnings before interest and tax (EBIT) had been cut from about $58 million to an expected range between zero profit to a potential loss of $10 million. In the end, the EBIT loss came in at $4.8 million, but revenue rose 11%, to $1.6 billion. The company slipped to a net loss of $13.8 million, from a profit of $79.6 million in FY22, but the market seemed to look past the T-ATS contract provision, at what would otherwise have been a healthy result.
For the half-year ended December 2023, Austal reported a revenue slide of 7%, to $718 million, but with net profit rising from a loss of $7.3 million in December 2022. For the full-year to June 2024, Austal has given guidance for a revenue rise of 8%—10% – it says that is “likely to be at the low end of the range” – and for underlying earnings before interest and tax (EBIT) to increase by 3%—4%.
In September last year https://switzerreport.com.au/4-global-leaders/) [1], I mentioned Austal as one of the ASX’s true global leaders, noting that analysts considered it an obvious takeover target. That possibility materialised earlier this month, when Austal knocked back a US$662 million ($1 billion) takeover offer worth from South Korean company Hanwha Ocean. The deal was considered unlikely to gain approval from regulators – but it showed that Austal is a tempting prize for larger companies in the defence arena. Analyst bullishness on Austal remains intact.
- Mayfield Group Holdings (MYG, 74 cents)
Market capitalisation: $67 million
12-month total return: 79%
Three-year total return: 21.3% a year
Estimated FY25 yield: 1.3%, unfranked
Analysts’ consensus valuation: $2.85 (Stock Doctor/Refinitiv, three analysts)
Electrical manufacturing business Mayfield Group Holdings completed a ‘back-door listing’ on the ASX in November 2020, through the reverse takeover of ASX-listed Stream Group. The company listed at an initial public offering (IPO) price of 36 cents, which it has more than doubled, to 74 cents, giving it a market capitalisation of $67 million.
Mayfield makes a range of electrical products (and services) for renewables, transmission, and industrial infrastructure for a number of sectors including defence, mining and oil and gas. Its products include high-voltage electrical switch rooms for power distribution and control for renewables (wind and solar), mining, heavy industry, and utilities, as well as customised control and protection systems, switchboards, kiosk substations and telecommunications systems for critical electrical infrastructure where safety and performance are crucial requirements.
Although it is not a widely known company, Mayfield is something of a poster child for Australian manufacturing, having decided in 2019 to move all of its manufacturing back to Australia, from Malaysia. By making most of its products at its Perth and Adelaide plants, the company says it can offer a consistency of quality and a reliability of supply that its competitors cannot match. Last year, Mayfield struck a deal with Perth-based Magellan Power to take over the manufacturing of the latter’s high-reliability range of AC and DC power equipment.
The company’s three businesses are:
- Mayfield Industries – produces customised control and protection systems, switchboards, kiosks, and transportable switch rooms for critical electrical infrastructure.
- Mayfield Services – it delivers high, medium and low-voltage infrastructure services for a broad range of clients across Australia.
- ATI Australia – a specialist provider of telecommunications and critical power products and services.
Across the three arms, the company’s clients are a diversified mix of mining, renewables, utilities, essential services, energy, and government.
In FY23, despite revenue decreasing by 5.4%, to $77.8 million, net profit surged to $3.9 million, from a net loss of $1.8 million in FY22. The company says it has work-in-hand (WIH) of about $85 million, stretching into the 2025 financial year.
Mayfield says all of its contracts are profitable; the company is confident in its future prospects and remains committed to its Australian manufacturing and technology application strategies. The Mayfield balance sheet is robust, with no debt. The company paid a maiden fully franked dividend in December 2022, and if it repeated its 1.7-cent fully franked dividend from FY23, the current (historical) yield would be 2.3%, or 3.3% grossed-up. The stock is not covered by any analysts, and its small daily turnover means that accumulating a decent stake would require patience, but in Mayfield’s relative obscurity it is chugging along quite nicely.
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