Sundance Resources Limited (ASX:SDL), a AUDA$38.87M 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, an extremely elevated growth of 32.94% in the upcoming year , and a massive growth of 39.25% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether Sundance Resources is lagging or leading in the industry. See our latest analysis for Sundance Resources
What’s the catalyst for Sundance Resources’s sector growth?
Overall, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. 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 past year, the industry delivered growth of 7.36%, beating the Australian market growth of 6.89%. Sundance Resources 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 Sundance Resources may be trading cheaper than its peers.
Is Sundance Resources and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 15x, in-line with the Australian stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.35% on equities compared to the market’s 11.87%. Since Sundance Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Sundance Resources’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Sundance Resources recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Sundance Resources as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value Sundance Resources based on its cash flows to determine if it is overpriced based on its current growth outlook.