Ultima United Limited (ASX:UUL), a AUDA$1.79M small-cap, is a real estate company operating in an industry which remains the single largest sector globally, and has continued to play a key role in investor portfolios as an asset class. Real estate assets usually exhibit distinct and desirable investment features compared to other types of securities, in particular, over a long period of time. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Australian stock market as a whole. Should your portfolio be overweight in the real estate sector at the moment? Today, I will analyse the industry outlook, and also determine whether Ultima United is a laggard or leader relative to its real estate sector peers. View our latest analysis for Ultima United
What’s the catalyst for Ultima United’s sector growth?
Not every category of real estate is likely to be impacted the same by macroeconomic factors such as interest rate hikes, and not all locations are primed to grow. So, investors must remain cautiously optimistic and analyse the fundamentals of the underlying industry. In the past year, the industry delivered negative growth of -6.03%, underperforming the Australian market growth of 6.89%. Ultima United 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 Ultima United may be trading cheaper than its peers.
Is Ultima United and the sector relatively cheap?
The real estate sector’s PE is currently hovering around 15x, in-line with the Australian stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 8.99% compared to the market’s 11.87%, potentially indicative of past headwinds. Since Ultima United’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Ultima United’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Ultima United has been a real estate industry laggard in the past year. If your initial investment thesis is around the growth prospects of Ultima United, there are other real estate companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Ultima United fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Ultima United 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 real estate 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 Ultima United’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Ultima United’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 real estate stocks instead? Use our free playform to see my list of over 100 other real estate companies trading on the market.