In This Article:
Emergent Resources Limited (ASX:EMG), a AU$3.18M small-cap, operates in the basic materials industry which can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. Basic material analysts are forecasting for the entire industry, a fairly unexciting growth rate of 3.77% in the upcoming year , and a robust short-term growth of 15.82% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. In this article, I’ll take you through the sector growth expectations, and also determine whether Emergent Resources is a laggard or leader relative to its basic materials sector peers. Check out our latest analysis for Emergent Resources
What’s the catalyst for Emergent Resources’s sector growth?
Overall, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be highly 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 in the teens, beating the Australian market growth of 6.91%. Emergent Resources 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 Emergent Resources may be trading cheaper than its peers.
Is Emergent Resources and the sector relatively cheap?
The metals and mining sector’s PE is currently hovering around 12.81x, relatively similar to the rest of the Australian stock market PE of 17.24x. 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 11.85% on equities compared to the market’s 11.37%. Since Emergent Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Emergent Resources’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:
Emergent Resources recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If the stock has been on your watchlist for a while, now may be the time to buy, if you like its ability to deliver growth and are not highly concentrated in the materials industry. However, before you make a decision on the stock, I suggest you look at Emergent Resources’s fundamentals in order to build a holistic investment thesis.