At £0.0775, Is It Time To Buy Modern Water plc (LON:MWG)?

Modern Water plc (AIM:MWG), a water utilities company based in United Kingdom, saw significant share price volatility over the past couple of months on the AIM, rising to the highs of £0.1 and falling to the lows of £0.08. This high level of volatility gives investors the opportunity to enter into the stock, and potentially buy at an artificially low price. A question to answer is whether Modern Water's current trading price of £0.08 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Modern Water’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change. Check out our latest analysis for Modern Water

What's the opportunity in Modern Water?

According to my relative valuation model, the stock seems to be currently fairly priced. I’ve used the price-to-book ratio in this instance because there’s not enough visibility to forecast its cash flows, and its earnings doesn’t seem to reflect its true value. The stock’s ratio of 0.95x is currently trading slightly below its industry peers’ ratio of 2.11x, which means if you buy Modern Water today, you’d be paying a relatively fair price for it. And if you believe Modern Water should be trading in this range, then there isn’t much room for the share price grow beyond what it’s currently trading. Furthermore, Modern Water’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.

What does the future of Modern Water look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. With revenue expected to more than double in the next few years, the future appears to be extremely bright for Modern Water. If expenses can also be maintained, it looks like higher cash flows is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has already priced in Modern Water’s positive outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at Modern Water? Will you have enough confidence to invest in the company should the price drop below its fair value?

Are you a potential investor? If you’ve been keeping tabs on Modern Water, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the positive outlook is encouraging for Modern Water, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Modern Water. You can find everything you need to know about Modern Water in the latest infographic research report. If you are no longer interested in Modern Water, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.