Magmatic Resources Limited (ASX:MAG), a AUDA$10.83M 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, a strong double-digit growth of 26.85% in the upcoming year , and an enormous 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. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether MAG is lagging or leading in the industry. See our latest analysis for MAG
What’s the catalyst for MAG’s sector growth?
Altogether the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be highly 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 6.76%, though still underperforming the wider Australian stock market. MAG 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 MAG may be trading cheaper than its peers.
Is MAG and the sector relatively cheap?
The metals and mining industry is trading at a PE ratio of 14x, 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 10.72% on equities compared to the market’s 11.92%. Since MAG’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge MAG’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? MAG has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of MAG, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how MAG fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If MAG has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its metals and mining peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at MAG’s future cash flows in order to assess whether the stock is trading at a reasonable price.