Australian Pacific Coal Limited (ASX:AQC), a AUDA$39.39M small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Basic material analysts are forecasting for the entire industry, an extremely elevated growth of 32.94% in the upcoming year , and a massive growth of 39.25% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Australian Pacific Coal is a laggard or leader relative to its basic materials sector peers. View our latest analysis for Australian Pacific Coal
What’s the catalyst for Australian Pacific Coal’s sector growth?
As a whole, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a natural trend. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the past year, the industry delivered growth of 7.36%, beating the Australian market growth of 6.90%. Australian Pacific Coal lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Australian Pacific Coal may be trading cheaper than its peers.
Is Australian Pacific Coal and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 15x, relatively similar to the rest of the Australian stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.35% on equities compared to the market’s 11.87%. Since Australian Pacific Coal’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Australian Pacific Coal’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Australian Pacific Coal has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of Australian Pacific Coal, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Australian Pacific Coal fits into your wider portfolio and the opportunity cost of holding onto the stock.