There wouldn't be many who think SCC Holdings Berhad's (KLSE:SCC) price-to-earnings (or "P/E") ratio of 11.9x is worth a mention when the median P/E in Malaysia is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings growth that's exceedingly strong of late, SCC Holdings Berhad has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for SCC Holdings Berhad
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Is There Some Growth For SCC Holdings Berhad?
There's an inherent assumption that a company should be matching the market for P/E ratios like SCC Holdings Berhad's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 140%. However, this wasn't enough as the latest three year period has seen a very unpleasant 23% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.7% shows it's an unpleasant look.
With this information, we find it concerning that SCC Holdings Berhad is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Bottom Line On SCC Holdings Berhad's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that SCC Holdings Berhad currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.