VDM Group Limited (ASX:VMG), a AUD$8.22M small-cap, is a engineering and construction (E&C) company operating in an industry, which is expected to benefit from higher gross domestic product, high consumer confidence, and upbeat private sector investments. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 15.22% in the upcoming year, and a low 9.58% growth over the next couple of years. This rate is below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether VMG is lagging or leading in the industry. View our latest analysis for VDM Group
What’s the catalyst for VMG's sector growth?
The E&C industry in Australia faces growing competition from players in China, Korea and India. Firms in rapidly growing economies have spent the past decade focusing on their home markets, gradually building up cash positions and internal expertise. Now, as growth eases in their home markets, they are expanding outward and seeking to compete against established global players. In the previous year, the industry saw growth of 4.18%, beating the Australian market growth of -4.59%. VMG leads the pack with its impressive earnings growth of 20.31% over the past year. This proven growth may make VMG a more expensive stock relative to its peers.
Is VMG and the sector relatively cheap?
The E&C sector's PE is currently hovering around 18x, in-line with the Australian stock market PE of 16x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 15.01% compared to the market’s 11.92%, potentially illustrative of past tailwinds. Since VMG’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge VMG’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? VMG 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 VMG as part of your portfolio. However, if you’re relatively concentrated in E&C, you may want to value VMG based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If VMG has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the E&C industry. Before you make a decision on the stock, take a look at VMG’s cash flows and assess whether the stock is trading at a fair price.