Agritrade Resources Limited (HKG:1131), a HK$10.4b small-cap, is an oil and gas company operating in an industry which has endured an extended oil price slump since 2014. However, Energy-sector analysts are forecasting for the entire industry, a positive double-digit growth of 20% in the upcoming year , and an enormous growth of 76% over the next couple of years. This rate is larger than the growth rate of the Hong Kong stock market as a whole. Is the oil and gas industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether Agritrade Resources is lagging or leading its competitors in the industry.
View our latest analysis for Agritrade Resources
What’s the catalyst for Agritrade Resources’s sector growth?
The oil and gas sector has been negative 40% in the past five years, due to the oil price crash. Only now has the sector begun turnaround, and in the prior year, saw growth in the thirties, beating the Hong Kong market growth of 15%. Agritrade Resources leads the pack with its impressive earnings growth of 81% over the past year. However, analysts are expecting its future earnings growth to be more in-line with the industry average, hovering at 20% over the next couple of years.
Is Agritrade Resources and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 11.62x, relatively similar to the rest of the Hong Kong stock market PE of 10.73x. 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% on equities compared to the market’s 9.6%, potentially illustrative of a turnaround. On the stock-level, Agritrade Resources is trading at a higher PE ratio of 24.36x, making it more expensive than the average energy stock. In terms of returns, Agritrade Resources generated 11% in the past year, in-line with its industry average.
Next Steps:
Agritrade Resources is an energy industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If Agritrade Resources has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the energy sector. However, before you make a decision on the stock, I suggest you look at Agritrade Resources’s fundamentals in order to build a holistic investment thesis.