Asiamet Resources Limited (AIM:ARS), a GBP£92.10M small-cap, operates in the basic materials industry which can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. Basic material analysts are forecasting for the entire industry, a positive double-digit growth of 23.50% in the upcoming year , and a whopping growth of 39.19% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether ARS is lagging or leading in the industry. See our latest analysis for ARS
What’s the catalyst for ARS’s sector growth?
As a whole, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly competitive and consolidation seems to be a natural trend. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth in the thirties, beating the UK market growth of 11.30%. ARS 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 ARS may be trading cheaper than its peers.
Is ARS and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 14x, relatively similar to the rest of the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 9.36% compared to the market’s 12.78%, potentially indicative of past headwinds. Since ARS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ARS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ARS has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of ARS, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ARS fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ARS 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 metals and mining 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 ARS’s future cash flows in order to assess whether the stock is trading at a reasonable price.