Anglo Australian Resources NL (ASX:AAR), a AUDA$27.08M 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, an extremely robust growth of 32.94% in the upcoming year , and a whopping 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. Below, I will examine the sector growth prospects, as well as evaluate whether Anglo Australian Resources is lagging or leading in the industry. Check out our latest analysis for Anglo Australian Resources
What’s the catalyst for Anglo Australian Resources’s sector growth?
Altogether the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. Over the past year, the industry saw growth of 7.36%, beating the Australian market growth of 6.88%. Anglo Australian 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 Anglo Australian Resources may be trading cheaper than its peers.
Is Anglo Australian Resources 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 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 10.35% on equities compared to the market’s 11.87%. Since Anglo Australian Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Anglo Australian Resources’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Anglo Australian Resources has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of Anglo Australian Resources, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Anglo Australian Resources fits into your wider portfolio and the opportunity cost of holding onto the stock.