Strategic partnerships, donations and prosecutions: Is Austal a good investment?

Today, Treasurer Jim Chalmers and Defence Industry Minister Pat Conroy will — according to information dropped to journalists — hold an “industry roundtable” with big super funds about “getting capital flowing towards opportunities that are in the national interest, delivering strong returns for investors and strong returns for our people”. The national interest includes “defence, energy and social services”, the latter requiring the participation of philanthropic organisations.

Conroy is quoted as saying it could lead to the opportunity for “everyday Australians to invest in the defence of their nation”. Sounds almost like a patriotic duty — perhaps big super funds might eventually be criticised for not doing the right thing by Australia’s men and women in uniform.

As Chalmers feels obliged to add, it’s not just about big super spending our hard-earned in areas deemed “in the national interest” but about “strong returns”, in case one might once again suspect that Labor views the multitrillion-dollar super industry it created as a vast honeypot for investment “in the national interest” — a year ago, that was deemed to be energy, housing and aged care.

There are a number of questions/red flags here. One is how many workers want their retirement savings invested in the arms industry. Another is the extent to which certain things are in the “national interest”. Both sides of politics believe that a “sovereign” defence industry is in the national interest (despite AUKUS manifestly undermining our sovereignty), but the Productivity Commission might disagree with that, as it’s likely to believe, rightly, that anything that needs “sovereign” stuck in front of it in policy discussions should automatically be regarded sceptically.

What about other interpretations of the national interest? When the Coalition returns to power, will super funds be told to invest in a “sovereign” coal-fired or nuclear power industry, because that’s in the national interest?

A third red flag is just how “strong” a return would our super funds get from investing in defence?

Well, it varies. If our super funds had invested in Lockheed a decade ago, as some of them undoubtedly were, they have since enjoyed a tripling of the value of their investment as the defence contractor’s share price has gone from record high to record high. Similarly, Northrop Grumman’s share price has more than quadrupled. As this period covered the back end of the war on terror, with Islamic State standing in for the “existential threat” of terrorism, and the beginning of a cold war with China, it bodes well for “everyday Australians” to invest in arms companies, if you’re into that sort of thing.

How about closer to home? Is shipbuilder Austal the sort of company that Conroy has in mind for “everyday Australians” to put their retirement savings into?

In late November, Deputy Prime Minister, Defence Minister and all-round genius Richard Marles announced, with Conroy, a “strategic partnership” with Austal, to “secure continuous building” at Henderson shipyard in Western Australia. In essence — as the Financial Review’s Andrew Tillett noted — it means rival shipbuilders will be squeezed out and Austal preferred for the building of the army’s heavy landing craft and two new Cape-class patrol boats.

The original Cape Class boats built by Austal were the subject of a truly scathing Auditor-General review in 2018 that led to some decidedly murky goings-on within the Commonwealth security bureaucracy.

That would turn out to be the least of Austal’s worries, however. In 2021, the Australian Securities and Investments Commission (ASIC) investigated the firm for breaching continuous disclosure requirements, with the company and its former CEO eventually fined. Things deteriorated significantly earlier this year when the US Securities and Exchange Commission — a real corporate regulator, rather than a pretend one like ASIC — announced it was investigating three former Austal executives for fraudulently manipulating cost estimates and prematurely recognising revenue.

In August, the company announced a loss for 2022-23 of $4 million, compared to a profit of $120 million the year before. “Cost inflation” in shipbuilding was cited by the company as one of the key reasons for the dramatic shift in fortunes.

Austal’s John Rothwell has long been aligned with the Liberal Party. But in recent years, Austal has begun donating to the federal Labor party, handing over $270,000 to Labor since 2017. The “strategic partnership” announced by Labor two weeks ago guarantees a supply line of work for the company in Western Australia, but its primary sources of revenue, and the primary risks to its financial future, will remain US naval contracts. Perhaps it’s a good opportunity for everyday Australians to invest in the defence of America instead.