MTQ Corporation Limited (SGX:M05), a SGD$54.08M small-cap, operates in the oil and gas industry which has seen a continued decline in oil prices since 2014. However, energy-sector analysts are forecasting for the entire industry, an extremely robust growth of 39.45% 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 Singapore stock market as a whole. Is now the right time to pick up some shares in oil and gas companies? In this article, I’ll take you through the energy sector growth expectations, and also determine whether MTQ is a laggard or leader relative to its energy sector peers. See our latest analysis for MTQ
What’s the catalyst for MTQ’s sector growth?
In the past five years, the oil and gas industry growth has been negative 40%, as a result of the oil price collapse. Although profitability is always a key metric, in the oil and gas industry, growth in production and reserves has often been more important. Only now has the sector begun to emerge from its turmoil, and in the past year, the industry turnaround delivered growth in the forties, beating the Singapore market growth of 7.79%. MTQ lags the pack with its lower growth rate of 24.59% over the past year, which indicates the company has been growing at a slower pace than its energy peers. As the company trails the rest of the industry in terms of growth, MTQ may also be a cheaper stock relative to its peers.
Is MTQ and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 23x, above the broader Singapore stock market PE of 15x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a similar 6.21% on equities compared to the market’s 7.92%, potentially illustrative of a turnaround. Since MTQ’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge MTQ’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? MTQ has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of MTQ, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how MTQ fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If MTQ 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 oil and gas 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 MTQ’s future cash flows in order to assess whether the stock is trading at a reasonable price.