2 ASX Defence Stocks Gaining Momentum

Defence is having a moment. Rising geopolitical tension, bigger budgets, and urgent demand for maritime capability and counter‑drone technology are translating straight into orders for Australian contractors. Two names in the sweet spot are Austal and DroneSh ield. One brings long‑cycle stability with a deep order book and margin recovery; the other brings high‑growth execution with software‑driven operating leverage. Together, they offer a balanced way to tap the defence upcycle.

Defence tailwinds meet delivery

What’s different in 2025 isn’t just the policy rhetoric—it’s delivery. Naval programs are moving from design into production, while counter‑UAS deployments are scaling from pilots to fleet rollouts. The result is visible revenue growth, stronger unit economics, and improved guidance across select ASX names. Austal and DroneShield are turning those tailwinds into tangible milestones: higher throughput, better margins, record contracts, and clearer multi‑year runways.

Austal (ASX: ASB): Order book depth and earnings recovery

Austal’s “dual engine”—US shipbuilding plus Australasian shipbuilding and support—produced a solid 1H FY25 step‑up in both revenue and profit, with a stronger 2H flagged as programs ramp. Importantly, the mix is improving as higher‑value US Navy work advances through milestones.

1. Strong 1H foundation: Revenue of about $825.7 million rose 15.1% year on year as US and Australasian shipbuilding accelerated. Net profit after tax of roughly $25.1 million jumped 108.9%, reflecting margin rebuild and better operating discipline.
2. Guidance and upgrades: Management reiterated full‑year EBIT guidance early in the half and subsequently indicated an increased unaudited FY25 EBIT minimum—an encouraging signal that execution is running ahead of plan.
3. Pipeline visibility: The US book is anchored by programs such as T‑AGOS (ocean surveillance), EPF Flight II, and options linked to Offshore Patrol Cutter (OPC) opportunities. In Australia, the Strategic Shipbuilding Agreement is expected to drive new orders and sustain higher utilisation. The combination provides a multi‑year throughput runway and capacity to keep margins trending higher as design phases convert to production.

Why it matters: Austal is coming out of a period of legacy headwinds with improving mix, expanding production, and better pricing power. As US and Australian projects roll forward, operating leverage into FY26 looks more durable—especially if Australasian support work and commercial builds keep utilisation high.

What to watch next:

• Second‑half revenue/margin cadence as US programs move deeper into production.
• Any awarded work under Australian government initiatives tied to the Strategic Shipbuilding Agreement.
• Cash conversion and working‑capital discipline as throughput rises.

Key risks:

• Program timing and cost discipline remain crucial in fixed‑price naval contracts.
• FX and supply‑chain tightness can pressure schedules and margin if not offset.

DroneShield (ASX: DRO): Contracts compounding and pipeline expanding

DroneShield is scaling into a global demand spike for counter‑UAS and electronic warfare. The company’s recent cadence shows the hallmarks of a breakout operator: record quarterly revenue, expanding contracted orders, and a growing software layer to lift recurring margins.

• Step‑change revenue: June‑quarter revenue of about $38.8 million rose roughly 480% year on year, taking 1H 2025 revenue to approximately $72.3 million (+210% YoY) on accelerated deliveries and broader customer adoption.
• Deep pipeline: A qualified pipeline near $2.3 billion spans roughly 284 projects, including 13 “whales” above $30 million. Demand is diversified across Europe, the US, and Asia, with operational activity reported in Ukraine and Israel—clear validation of product‑market fit in high‑tempo theatres.
• Landmark order flow: An all‑time record European military contract landed in mid‑July, with deliveries scheduled through Q3 2025—supporting 2H execution and de‑risking revenue visibility.
• SaaS momentum: Quarterly SaaS revenue reached about $1.9 million. Management is targeting materially higher recurring income by 2026 as next‑gen AI software and integrated platforms scale alongside hardware.

Why it matters: Contracted revenue already tracking above last year’s total is a powerful setup for operating leverage. As software and services compose a bigger share of mix, blended margins should rise, improving cash generation and resilience through cycles.

What to watch next:

1. Delivery cadence on the record European order and timing of additional US/European awards.
2. Growth of subscription/recurring revenue as new software features roll out.
3. Inventory turns and working capital as the company scales production.

How they complement a defence allocation

1. Different cycles, same direction: Austal brings long‑cycle, contracted cash flows and sustainment visibility; DroneShield adds short‑cycle growth with a rising software flywheel. Together, they balance stability with upside.
2. Policy alignment: Both names are direct beneficiaries of allied modernisation—surface fleets, surveillance, and counter‑UAS are priority spending lines with multi‑year budgets behind them.
3. Operating leverage: Austal’s margin rebuild should continue as production ramps; DroneShield’s margin expansion should come from software mix and scale economies.

A simple framework to track progress

1. For Austal: Watch awarded work (US Navy, Australian programs), production milestones, EBIT guidance updates, and cash conversion. Margin trajectory is the tell—sustained improvement signals stronger execution and pricing.
2. For DroneShield: Track quarterly revenue/SaaS growth, conversion of large pipeline opportunities, and delivery timing on landmark contracts. Recurring revenue as a percentage of total is the key metric for quality of earnings.

Bottom line Austal and DroneShield are not just riding defence tailwinds—they’re translating them into better numbers and clearer runways. Austal’s earnings recovery and deep order book provide stable exposure to naval modernisation, while DroneShield’s contract momentum and software layer offer high‑growth torque to the counter‑UAS build‑out. For investors seeking diversified defence exposure on the ASX, this pairing blends durability with acceleration—well suited to a market where delivery now matters as much as

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