Our 12-month target price of $4.09 is derived by rolling forward our blended valuation at the cost of equity, less the next 12 months of dividends to be paid. Our blended valuation is the average of the following three valuation methodologies:

• DCF valuation of $3.86, 
• PE Rel valuation of $3.40, and
• Sum-of-the-parts valuation of $3.82.

Our DCF valuation is derived using a beta of 1 and a WACC of 10%. We use a risk-free rate of 4% and a terminal growth rate of 3.8%.
Our SOTP valuation is derived by comparing Austal with other defence contractors and commercial shipbuilders.
Using a PE relative measure, we value Austal in line with the FY26e ASX 200 Industrials ex Financials and REITS given greater visibility over the pipeline from newer shipbuilding contracts offsetting the LCS work which starts diminishing over the medium term.

We see the following downside risks to our target price: i) cost overruns in expansion programs and shipbuilding contracts; ii) leakage of critical information; iii) US Department of Defence spending cuts; iv) economic slowdown; and v) inability to replenish its US pipeline.
The key upside risks to our target price are Austal winning a new US defence contract and Asian defence opportunities.  
If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our financial forecasts and price targets. Conversely, if any of these factors proves to have less of an effect than we anticipate, the stock could materially outperform our target.