Argonaut Research Flags Defence Sector Upside as Spending Pressure Builds

Defence Becomes Structural, Not Cyclical

If there was ever any doubt that defence is now a structural, not cyclical, theme for Australian industry, Argonaut’s Defence Sector Update makes the case with conviction. Between Canberra’s estate reshuffle, Washington’s blunt burden-sharing demands and the slow but steady drumbeat of AUKUS infrastructure, the opportunity set for local contractors is widening - particularly for larger, more liquid players capable of absorbing multi-year work programs .

Rendering of SSN-AUKUS submarine (BAE Systems)

The note, authored by Argonaut analyst Pia Donovan, argues that recent share price weakness across listed defence names has created a more attractive entry point just as policy, funding and geopolitics are aligning in the sector’s favour.

The Defence Estate Audit: Selling to Spend More

At the centre of the domestic reset is the Defence Estate Audit and the planned divestment of 67 defence sites. Argonaut stresses this is not a contraction but a redistribution of capital and resources, away from surplus or poorly located assets and towards Northern Australia and key naval precincts.

The divestment program could generate around $3 billion in proceeds, even after allowing for approximately $1.2 billion in relocation and remediation costs.

Importantly, all proceeds are to be recycled back into defence priorities, accelerating spending on bases, ports, airfields and hard-stand infrastructure at locations such as HMAS Stirling, Henderson and Osborne.

For industry, this translates into a visible pipeline of work across construction, electrical infrastructure, remediation and sustainment.

Washington Turns Up the Heat

The global overlay is becoming harder to ignore. The unclassified US 2026 National Defence Strategy reinforces Washington’s demand that allies lift defence spending to 3.5% of GDP. Australia remains well short of that mark, currently spending around 2% of GDP, with forecasts rising only modestly.

Argonaut views this gap as a growing catalyst for further domestic defence funding, particularly as tensions in the Indo-Pacific intensify and timelines for AUKUS-related projects accelerate.

Billions Already Locked In

Defence spending is already on a steep upward curve. Since 2020, the Australian Government has added nearly $70 billion in planned defence funding over the next decade, lifting total investment in defence capabilities to close to $350 billion. Annual defence spending is expected to rise from around $59 billion today to almost $100 billion by 2034.

HMAS Stirling Navy Base. (stock image) Credit: Supplied

Infrastructure is a key beneficiary. HMAS Stirling alone is expected to require around $8 billion of upgrades to support nuclear-powered submarines, while the shipyards at Osborne in South Australia and Henderson in Western Australia are slated for multi-billion-dollar redevelopments.

Austal (ASX: ASB): Liquidity and Leverage to the US

Austal remains the largest and most liquid defence stock in Argonaut’s coverage. The completion of the Guardian-class patrol boat program removes a headline revenue stream, but Argonaut notes this has already been offset by the $1.03 billion Landing Craft Medium contract.

Beyond Australia, Austal’s exposure to the US defence market is a key differentiator. The broker highlights that accelerated US defence spending and ship procurement under the FY26 defence bill directly align with Austal’s existing capabilities and pipeline. Recent share price weakness prompted Argonaut to trim its price target to $7.50, but also to upgrade the stock to a Buy, arguing the pullback offers a more compelling risk-reward for investors seeking scale and liquidity.

Civmec (ASX: CVL): Heavy Engineering with Defence Optionality

Civmec is positioned as a diversified engineering and construction group with increasing leverage to defence infrastructure. A key overhang for the stock had been the timing and certainty of the Perth Park precinct, but Argonaut points out that construction commenced in early February, materially de-risking that project.

With established relationships across naval infrastructure and heavy engineering, Civmec is seen as well placed to capture work at Henderson and Osborne as defence spending ramps up. Argonaut reiterates its Buy rating and $1.90 price target, viewing Civmec as a steady beneficiary of long-dated infrastructure investment rather than a single-project story.

Duratec (ASX: DUR): Near-Term Catalysts at HMAS Stirling

Duratec stands out for its specialist capabilities in remediation, electrical infrastructure and asset maintenance – all highly relevant to defence base upgrades. Recent contract wins, including a $25.8 million electrical infrastructure project with CSIRO, reinforce its credentials in technically demanding work.

Argonaut sees Duratec as one of the most leveraged names to near-term defence infrastructure awards, particularly at HMAS Stirling. The broker lifted its price target to $2.50 and continues to flag the company as a key pick, citing strong margins, balance sheet capacity and growing defence exposure.

Bhagwan Marine (ASX: BWN): Small Cap, Big Optionality

Bhagwan Marine offers the highest total shareholder return across Argonaut’s defence coverage. The acquisition of Riverside Marine is expected to lift margins and diversify earnings, while also increasing the group’s exposure to defence-related marine services.

While defence is not yet the dominant earnings driver, Argonaut notes that Bhagwan’s capabilities position it well to benefit from increased naval and port activity over time. The broker retains a Buy rating and a $0.75 price target, highlighting strong cash flow as a key attraction.

Saunders (ASX: SND): Recovery Story with Defence Exposure

Saunders remains the most cautious name in the near term, with Argonaut flagging a weaker first half due to reduced activity levels. However, multiple contract awards announced late in calendar 2025 are expected to support a stronger second half and FY27 recovery.

The broker lifted its price target to $1.05 and retains a Buy rating, noting that Saunders’ exposure to defence and infrastructure projects provides leverage to improving conditions, albeit with more earnings volatility than peers.

Valuations Adjust, Conviction Remains

Across the sector, Argonaut has adjusted price targets to reflect updated earnings profiles and valuation multiples, but conviction remains high. All five companies under coverage retain Buy ratings, with Civmec and Duratec highlighted as key picks and Austal offering renewed appeal following its share price pullback.

The conclusion from Pia Donovan’s analysis is measured rather than promotional. Defence spending will not be perfectly linear, labour constraints remain a risk and government timelines can slip. But with Canberra reallocating its defence estate, Washington applying pressure and AUKUS infrastructure shifting from planning to execution, Australia’s listed defence contractors are increasingly operating in a target-rich environment rather than a speculative one.