Sunbridge Group Limited (ASX:SBB), a AUDA$5.19M small-cap, operates in the retail industry which has experienced a structural shift in terms of digitalization. Looking at trends for growth in macroeconomic factors such as inflation and interest rates are important when thinking about investing in retailers. Retail analysts are forecasting for the entire industry, a positive double-digit growth of 11.63% in the upcoming year , and a whopping growth of 38.91% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. I’ll take you through the retail sector growth expectations, as well as evaluate whether SBB is lagging or leading its competitors. View our latest analysis for Sunbridge Group
What’s the catalyst for SBB’s sector growth?
E-retailing is expected to remain the fastest growing sales channel, shifting the retail landscape. Significant number of retail store closures and bankruptcies were an indication of both changing consumer preferences and rising online competition. Over the past year, the industry saw growth in the teens, beating the Australian market growth of 5.37%. SBB lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its retail peers. As the company trails the rest of the industry in terms of growth, SBB may also be a cheaper stock relative to its peers.
Is SBB and the sector relatively cheap?
Retail companies are typically trading at a PE of 15x, in-line with the Australian stock market PE of 17x. 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 13.31% on equities compared to the market’s 11.92%. Since SBB’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SBB’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SBB has been a retail industry laggard in the past year. If your initial investment thesis is around the growth prospects of SBB, there are other retail companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how SBB fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If SBB 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 retail 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 SBB’s future cash flows in order to assess whether the stock is trading at a reasonable price.