Ark Mines Limited (ASX:AHK), a AUDA$4.52M small-cap, is a metals and mining operating in an industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Furthermore, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 25.15% in the upcoming year , and a whopping growth of 41.20% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Is the metals and mining industry an attractive sector-play right now? Below, I will examine the sector growth prospects, and also determine whether AHK is a laggard or leader relative to its basic materials sector peers. View our latest analysis for Ark Mines
What’s the catalyst for AHK’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 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 previous year, the industry saw growth of 6.76%, beating the Australian market growth of 5.37%. AHK 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 AHK may be trading cheaper than its peers.
Is AHK and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 14x, in-line with the Australian stock market PE of 17x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 11.83% on equities compared to the market’s 11.92%. Since AHK’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge AHK’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? AHK has been a metals and mining industry laggard in the past year. If your initial investment thesis is around the growth prospects of AHK, there are other metals and mining companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how AHK fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If AHK 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 AHK’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Ark Mines’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.