Collection House Limited (ASX:CLH), a AU$207.2m small-cap, is a commercial services company operating in an industry, which is faced with evolving conditions and potential further consolidation to gain market share. Commercial services analysts are forecasting for the entire industry, a strong double-digit growth of 20.8% in the upcoming year , and an enormous growth of 37.4% over the next couple of years. However this rate still came in below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Collection House is a laggard or leader relative to its service sector peers.
View our latest analysis for Collection House
What’s the catalyst for Collection House’s sector growth?
A main driver of the industry has been the growing relevance of e-commerce, enabling companies to reduce cost to serve while growing market presence. Over the past year, the industry saw growth in the forties, beating the Australian market growth of 10.3%. Collection House leads the pack with its impressive earnings growth of 50.3% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be 1.6% compared to the wider commercial services sector growth hovering in the twenties next year. As a future industry laggard in growth, Collection House may be a cheaper stock relative to its peers.
Is Collection House and the sector relatively cheap?
The commercial services industry is trading at a PE ratio of 17.32x, relatively similar to the rest of the Australian stock market PE of 17.19x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 12.6% on equities compared to the market’s 11.8%. On the stock-level, Collection House is trading at a lower PE ratio of 7.93x, making it cheaper than the average commercial services stock. In terms of returns, Collection House generated 12.6% in the past year, in-line with its industry average.
Next Steps:
Collection House is a commercial services industry laggard in terms of its future growth outlook. This is possibly reflected in the PE ratio, with the stock trading below its peers. If the stock has been on your watchlist for a while, now may be the time to dig deeper. Although the market is expecting lower growth for the company relative to its peers, Collection House is also trading at a discount, meaning that there could be some value from a potential mispricing. However, before you make a decision on the stock, I suggest you look at Collection House’s fundamentals in order to build a holistic investment thesis.