Alchemia Limited (ASX:ACL), a AUDA$4.22M small-cap, operates in the healthcare industry, which has experienced tailwinds from issues such as higher demand driven by an aging population and the increasing prevalence of diseases and comorbidities. Healthcare analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Alchemia is a laggard or leader relative to its healthcare sector peers. View our latest analysis for Alchemia
What’s the catalyst for Alchemia’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth of 9.22%, beating the Australian market growth of 6.93%. Alchemia lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Alchemia may be trading cheaper than its peers.
Is Alchemia and the sector relatively cheap?
The biotech sector’s PE is currently hovering around 27x, higher than the rest of the Australian stock market PE of 18x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 16.12% compared to the market’s 11.86%, which may be indicative of past tailwinds. Since Alchemia’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Alchemia’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Alchemia has been a biotech industry laggard in the past year. If your initial investment thesis is around the growth prospects of Alchemia, there are other biotech companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Alchemia fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Alchemia has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its biotech peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Alchemia’s future cash flows in order to assess whether the stock is trading at a reasonable price.