Investors Set Sail: BAE Systems Tapped to Build Next-Gen Submarines for Australia

Updated On: March 22, 2024 9:45 am

BAE Systems Inc. BAESY has been chosen by Australia’s government to construct nuclear-powered submarines as part of a joint military initiative, announced recently.

The collaboration, with ASC Pty Ltd as its partner, is a strategic move under the AUKUS trilateral security pact among the U.K., Australia and the U.S. According to the AUKUS pact, Australia and the U.K. will operate a common submarine, integrating technology from all three countries, based on the U.K.’s next-gen design led by BAE Systems.

Strategic Positioning of BAE Systems

In the current milieu where nations are ramping up defense spending, investments in sea warfare capabilities, particularly submarines for defense and offense, are gaining significant momentum. This uptrend bodes well for BAE Systems, renowned for manufacturing the Astute Class and Dreadnought Class submarines.

Since the declaration of the AUKUS agreement in March 2023, BAE Systems has augmented its U.K. submarine workforce to 13,500 employees, with plans to expand to around 17,000 to support the SSN-AUKUS submarine program. Notably, the SSN-AUKUS initiative promises to deliver the largest and most formidable attack submarine for the Royal Navy.

Back in October 2023, the U.K. Ministry of Defence awarded BAESY a £3.95 billion contract for developmental work related to SSN-AUKUS through 2028. Geared to replace the existing Astute Class, the inaugural U.K. submarine under the SSN-AUKUS program is set for delivery in the late 2030s, with the first Australian submarine following suit in the early 2040s.

Such strides are poised to significantly profit BAESY, propelling order flows for its manufactured submarines, including the most recent commission. These contract victories are expected to strengthen its revenue streams in the Maritime segment, accounting for 22% of its total revenues in 2023.

Prospects for Growth

Nuclear-equipped submarines enhance a country’s military capabilities and act as a deterrent against potential nuclear assaults in sea warfare missions. The progress in submarine technology, coupled with its stealth features, also contributes to its multifaceted advantages, thereby amplifying the demand for submarines globally.

Per a report from Research and Markets, the global submarine market is projected to witness a 4.3% compound annual growth rate during 2024-2028. This signals ample growth opportunities for BAE Systems, solidifying its position in the submarine arena.

Other players in the defense industry set to benefit from the burgeoning submarine market include General Dynamics (GD), Northrop Grumman (NOC) and Huntington Ingalls Industries (HII).

General Dynamics’ Electric Boat division is the prime contractor and leading shipyard for all U.S. Navy nuclear-powered submarine projects. As of the end of 2023, the company boasted a backlog worth $18 billion for Virginia-class submarines and $13.3 billion for Columbia-class submarines.

General Dynamics exhibits a long-term growth rate of 10.8%. The Zacks Consensus Estimate for its 2024 sales indicates a 10.1% growth from 2023.

Northrop provides systems and sensors for Virginia-class submarines, and also manufactures the launcher subsystem for a common missile compartment for the U.S. Navy’s Columbia and the Royal Navy’s Dreadnought submarines.

Northrop Grumman boasts a long-term growth rate of 10.1%. The Zacks Consensus Estimate for its 2024 sales reflects a 4.6% growth from 2023.

Huntington Ingalls collaborates with General Dynamics’ Electric Boat for the development of Virginia-class fast-attack nuclear submarines. Its Newport News division is actively engaged in designing and constructing the Columbia-class (SSBN 826) submarine as a replacement for the aging Ohio-class nuclear ballistic missile submarines.

Huntington Ingalls Industries reports a long-term growth rate of 6.5%. The Zacks Consensus Estimate for its 2024 sales projects a 2% growth from 2023.