Sovereign Mines Of Africa PLC (AIM:SMA): How Much Growth Is Left In Basic Materials?
Sovereign Mines Of Africa PLC (AIM:SMA), a GBP£2.32M 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 positive double-digit growth of 23.50% in the upcoming year , and a whopping growth of 39.19% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether SMA is a laggard or leader relative to its basic materials sector peers. See our latest analysis for SMA
What’s the catalyst for SMA’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. 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 past year, the industry delivered growth in the thirties, beating the UK market growth of 11.30%. SMA 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 SMA may be trading cheaper than its peers.
Is SMA 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 UK stock market PE of 19x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 9.36% compared to the market’s 12.78%, potentially indicative of past headwinds. Since SMA’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SMA’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SMA recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto SMA as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value SMA based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If SMA has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the metals and mining industry. Before you make a decision on the stock, take a look at SMA’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Sovereign Mines Of Africa’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
