Rising Defence Budgets Create Momentum for ASB, BIS, EOS, DRO, and CDA

Australia’s defence sector is undergoing a major transformation, with rising government spending, policy reforms, and international collaborations creating new opportunities for domestic firms. From naval shipbuilding and advanced technology projects to AUKUS initiatives, key programs are reshaping the industry. ASX-listed companies such as Austal (ASB), Bisalloy Steel (BIS), Electro Optic Systems (EOS), DroneShield (DRO), and Codan (CDA) are well-positioned to benefit, making this a pivotal moment for investors and industry watchers alike. Read on to see how these changes are opening doors for growth and innovation in Australia’s defence landscape.

The transformation of Australia’s defence sector is opening up significant opportunities for domestic firms, driven by a mix of financial incentives, policy shifts, and closer integration with international partners.

 

How Direct Government Spending and High-Priority Programs Are Driving Growth for Defence Companies

At the forefront is the surge in government defence spending, which has translated into a wave of new contracts for high-priority programs. Companies that secure work on initiatives such as the Hunter-class frigates, the Guided Weapons and Explosive Ordnance (GWEO) Enterprise, and AUKUS-related projects stand to see a meaningful boost in their business.

Beyond contract wins, the government’s push for “sovereign capability” presents another lever for growth. Firms that can deliver equipment domestically – ranging from munitions to military vehicles – are well-positioned to benefit from the “made in Australia” agenda.

AUKUS’s Pillar II, focused on advanced capabilities, adds a further catalyst. Businesses working in AI, quantum computing, hypersonic, and other cutting-edge technologies could tap into new collaborations and investments from international partners. The Advanced Strategic Capabilities Accelerator (ASCA) strengthens this effect, providing funding to accelerate emerging technologies developed by small and medium enterprises (SMEs).

 

The Scale of Australia’s Defence Spending and Strategic Commitment

Australia’s defence budget is on a steep upward trajectory, reflecting the country’s new strategic priorities. Defence spending reached approximately USD 63.474 billion in the financial year ending June 2025, equivalent to 2.3% of GDP, up from 1.6% a decade ago. The government plans further increase, with the Treasurer signalling funding could rise beyond 2.3% of GDP by the early 2030s, and the Coalition reportedly considering a target of 2.5% by 2029.

Source: Investor Pulse, Research (2025) [1]

This expansion aligns with NATO benchmarks and responds to international pressure, particularly from the United States, which has urged Australia to increase its spending to avoid “free riding” on American military protection.

 

How Reforms to Export Control Processes and Integration into AUKUS Supply Chains Are Opening Global Opportunities

Australia is also overhauling its export control framework to better integrate into Western defence supply chains. A national exemption will allow smoother exports to AUKUS partners, giving Australian companies easier access to the US and UK markets. This is not just about revenue – it is a strategic move to embed domestic firms as integral parts of the alliance’s industrial base, boosting interoperability and resilience.

The Defence Industry Development Grants Program further supports this trend, with a dedicated “Exports stream” helping SMEs overcome barriers and compete in priority areas.

 

Specific ASX-Listed Companies Positioned to Benefit from the Transformation of Australia’s Defence Industry

The sector’s transformation offers clear pathways for certain ASX-listed firms. Austal Ltd (ASX: ASB), the country’s largest defence exporter, stands to gain from naval shipbuilding programs including Landing Craft Medium (LCM) and Landing Craft Heavy (LCH). Bisalloy Steel Group Ltd (ASX: BIS), Australia’s sole producer of high-tensile and armour steel, plays a central role in the sovereign supply chain, with its products already used in AUKUS-related deliveries.

For next-generation warfare, Electro Optic Systems Holdings Ltd (ASX: EOS) and DroneShield Ltd (ASX: DRO) are well-positioned to benefit from accelerated acquisition of advanced capabilities, including counter-drone and C4 systems. Both firms have secured key contracts and are expanding their global reach. Codan Ltd (ASX: CDA), a tactical communications manufacturer, is also set to benefit from the broader push toward interoperability, with its products increasingly aligned with Five Eyes and NATO requirements.

Source: Google Finance (2025) [2]

 

Austal Ltd (ASX: ASB)

Source: ASB, weekly chart (2025)

Austal’s (ASX: ASB) FY25 results mark a clear turnaround, with strong growth across its operations. Revenue rose 24% to $1.82 billion, boosted by new shipbuilding programs in the United States and Australia. That top-line momentum flowed through to earnings, with EBIT more than doubling to $113.4 million. The Australasia segment was a standout, recovering from a $12.6 million loss to deliver $36.0 million in EBIT. The balance sheet also strengthened, with cash rising to $583.9 million and a net cash position of $453.1 million, giving the company a solid platform to fund its planned expansion in shipbuilding capacity and capability.

Investors are clearly backing Austal’s long-term trajectory. With a trailing P/E of 35.11 and a forward P/E of 40.39, the valuation is underpinned by a near-record $13.1 billion order book, providing revenue visibility well into the next decade. The dual-market approach, strong recovery in Australasia alongside a US EBIT contribution of $97.7 million, helps mitigate the risk of procurement cycles in any single market. A key strategic shift is the company’s move into steel shipbuilding, supported by a $220 million capital raise and a $488.5 million credit facility. This positions Austal to take on a wider range of naval contracts, including future steel-hull projects aligned with the AUKUS Pillar 1 initiative.

From an investment perspective, Austal remains a cornerstone holding in the naval defence sector. The stock has outperformed over the past year, though recent overbought signals suggest short-term consolidation could be on the horizon. Beyond technical, the company’s global footprint, long-horizon order book, and alignment with Australia’s continuous naval shipbuilding program make it a foundational play. Ongoing investment in steel capabilities further secures a long-term revenue pipeline, reinforcing Austal’s role as a key beneficiary of Australia’s defence sector expansion.

 

Bisalloy Steel Group Ltd (ASX: BIS)

Source: BIS, weekly chart (2025)

Bisalloy Steel Group delivered a standout financial performance in FY25, with profit after tax attributable to members rising 24.4% to $19.6 million. Operating EBITDA also climbed 19.5% to $31.9 million, underscoring the company’s strategic diversification and resilience. Much of this growth was driven by its participation in the one-off AUKUS Hull Steel qualification contract, which made a substantial contribution to earnings. Defence-related revenue more than offset weaker demand from the commercial sector, particularly in Western Australia, where major iron ore producers pulled back amid soft global commodity prices. FY25 highlights a successful pivot from a historically cyclical industry, with defence emerging as a reliable growth engine.

The market is taking note. Bisalloy’s trailing P/E of 13.60 is well above its decade-long average of 9.17, reflecting a re-rating as investors price in the strategic value of its defence contracts. While the AUKUS contract is a short-term, one-off event, it lays the groundwork for a multi-decade relationship with the Australian, UK, and US defence industries. Bisalloy’s steel is critical for armoured vehicles and submarines, and its qualification for SSN-AUKUS submarines represents a pivotal step toward embedding the company in the trilateral supply chain. The strategic positioning was further reinforced by an initial purchase order of processed Australian steel by Newport News Shipbuilding, the US’s largest military shipbuilder, showing that Bisalloy’s products are already integrating into the AUKUS network.

For investors, Bisalloy represents a core, long-term holding. The company offers exposure to the fundamental elements of defence manufacturing, providing a low-volatility anchor that benefits from the AUKUS tailwind. Strong financial results, disciplined capital management, and a solid dividend track record add to its appeal, making it a sensible addition to a well-rounded portfolio.

 

Electro Optic Systems Holdings Ltd (ASX: EOS)

Source: EOS, weekly chart (2025)

Electro Optic Systems (ASX: EOS) painted a nuanced picture in the first half of FY25, defined by a deliberate corporate transformation. Revenue from continuing operations fell 58.2% to $44.1 million, reflecting a temporary slowdown in defence contract deliveries. Yet behind this headline decline, the company was busy restructuring. The divestment of its non-core EMS business generated a one-off profit of $91.3 million from discontinued operations, while early repayment of borrowings helped clean up the balance sheet. These moves are part of a broader plan to focus on EOS’s core defence and space operations.

Looking ahead, the company’s contracted backlog of around $307 million as of August 2025, more than three times the prior period, offers significant revenue visibility for the coming years. Its valuation today is driven more by potential than recent results. Strategic alignment with AUKUS Pillar 2 has underpinned a consensus buy rating, with the $125 million export order for its high-power laser weapon system, reportedly the first of its kind globally, highlighting EOS’s technological leadership. Domestically, its role as a key subcontractor on the Australian Defence Force’s $1.3 billion Project LAND 156 for counter-drone capabilities further cements its position in a rapidly expanding sector. The company’s pipeline suggests potential contracts exceeding $500 million per customer, pointing to substantial future revenue.

Volatility has marked the stock, but strong gains over the past year indicate robust market interest. For growth-focused portfolios, EOS offers exposure to cutting-edge counter-drone and high-energy laser technologies, areas that align closely with AUKUS priorities. With its financial turnaround largely complete, the company appears well positioned to lead a new segment of the global defence market, converting its extensive backlog into revenue and capturing large-scale opportunities on the horizon.

 

DroneShield Ltd (ASX: DRO)

Source: DRO, weekly chart (2025)

DroneShield (ASX: DRO) posted a standout first half for FY25, underlining its leadership in the counter-unmanned aerial systems (C-UAS) market. Revenue jumped 210% year-on-year to $72.3 million, marking the company’s strongest half-year performance to date. The top-line surge was mirrored by a return to profitability, with net profit after tax of $2.1 million, reversing a $4.8 million loss in the same period last year. Strong cash flows supported this performance, with receipts up 185% and a robust cash balance of $204 million, all debt-free. This financial headroom gives DroneShield the flexibility to self-fund growth initiatives, including expanding manufacturing capacity. Already, the company has secured $176.3 million of revenue for FY25, surpassing its total for FY24, highlighting the momentum behind its business.

The market’s view of DroneShield is reflected in its valuation. A normalized P/E of 290.34 and a P/S of 20.52 point to a premium for its unique position in the C-UAS sector. The company’s sales pipeline has more than doubled to $2.34 billion, pointing to significant future revenue potential. Beyond its hardware, DroneShield is pivoting towards AI-driven solutions and recurring revenue, with a substantial portion of annual R&D dedicated to AI upgrades. This approach supports “SaaS attach rates” and repeat revenue across the product lifecycle, transforming the company from a hardware vendor into a scalable, high-margin technology platform.

While technically the stock has outperformed the ASX All Ordinaries Index over six months, it carries the label of a “Momentum Trap,” indicating high volatility and potential sharp reversals. Even so, for growth-focused portfolios, DroneShield provides direct exposure to a rapidly modernising area of defence. Its financial turnaround, expansive sales pipeline and focus on AI and recurring revenue make it a compelling, but high-risk, play for capital appreciation.

Codan Ltd (ASX: CDA)

Source: CDA, weekly chart (2025)

Codan (ASX: CDA) reported a strong FY25, underlining its resilience and strategic alignment with key growth sectors, notably defence. Group revenue rose 22% to $674.2 million, driving a 28% lift in EBIT to $146.0 million and a 27% jump in net profit after tax to $103.5 million. The Communications division, which covers tactical defence and unmanned systems, was a standout performer, with revenue up 26% and an order book swelling to $253 million. Disciplined financial management was also evident, with net debt falling by $45.8 million thanks to strong second-half cash generation, leaving Codan well-positioned for both growth and future acquisitions.

The company’s valuation reflects a diversified business model and healthy profitability. Unlike pure-play defence firms, Codan combines technology expertise with growing defence exposure, reducing reliance on any single market. Its communications arm is particularly well-placed for modern warfare demands, exemplified by a $15 million contract to supply Sentry Mesh 6161 radios for the Australian Defence Force’s new Sypaq Systems CorvoX drones. This deal highlights Codan’s ability to leverage core radio-communications expertise to capture high-growth segments like unmanned systems, where tactical communications contributed roughly $100 million in FY25 revenue. Its inclusion in the S&P/ASX 200 further underscores a mature, stable, and steadily growing business profile that appeals to a wide range of institutional investors.

From a technical standpoint, Codan offers lower volatility and a more stable profile than many high-growth peers. Average daily volumes and technical indicators are moderate, reflecting an established and diversified operation. For investors seeking defence technology exposure but with a preference for resilience and steady growth, Codan stands out. Its value lies not in a single blockbuster contract but in a string of profitable wins across multiple divisions. Strong financial performance, disciplined capital management, and strategic acquisitions, including Kägwerks, make it a sensible and compelling addition to a well-rounded portfolio.