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Kangda International Environmental Company Limited (HKG:6136), which is in the water utilities business, and is based in China, led the SEHK gainers with a relatively large price hike in the past couple of weeks. Less-covered, small caps tend to present more of an opportunity for mispricing due to the lack of information available to the public, which can be a good thing. So, could the stock still be trading at a low price relative to its actual value? Let’s take a look at Kangda International Environmental’s outlook and value based on the most recent financial data to see if the opportunity still exists.
See our latest analysis for Kangda International Environmental
What is Kangda International Environmental worth?
The stock seems fairly valued at the moment according to my relative valuation model. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 4.08x is currently trading slightly below its industry peers’ ratio of 7.1x, which means if you buy Kangda International Environmental today, you’d be paying a reasonable price for it. And if you believe that Kangda International Environmental should be trading at this level in the long run, then there’s not much of an upside to gain from mispricing. Is there another opportunity to buy low in the future? Since Kangda International Environmental’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.
What kind of growth will Kangda International Environmental generate?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Though in the case of Kangda International Environmental, it is expected to deliver a relatively unexciting earnings growth of 9.3%, which doesn’t help build up its investment thesis. Growth doesn’t appear to be a main reason for a buy decision for Kangda International Environmental, at least in the near term.
What this means for you:
Are you a shareholder? It seems like the market has already priced in 6136’s growth outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at 6136? Will you have enough confidence to invest in the company should the price drop below its fair value?