The outlook for the resources sector continues to be relatively positive. World economic growth has been strong in recent quarters, with the US and China both delivering impressive performance. And while a stronger dollar may reduce demand for resources to some degree, buoyant commodity prices such as the oil price have caused valuations across the sector to generally improve.
One company, though, which has struggled in recent years versus the FTSE 100 is Petrofac (LSE: PFC). The support services company’s shares have increased in value recently, but still lag the wider index in the last five years. Here’s why that could be about to change.
Low valuation
While Petrofac has recorded a rise in its share price in recent months, it is still down by over 50% in the last five years. Some of this disappointing performance is down to difficulties in the energy sector during that time, while the SFO investigation has also caused investor sentiment to remain downbeat. However, the company has enjoyed improved performance regarding contract wins, and this could help to stabilise its bottom line over the long run.
Still, the company continues to face a disappointing near-term outlook. In the current year its bottom line is expected to fall by 18%, followed by a further decline of 6% next year. However, investors seem to have factored-in its uncertain outlook, with its shares trading on a forward price-to-earnings (P/E) ratio of around 10 at the present time. As such, and while it has endured a difficult period, the risk/reward ratio for the stock could be appealing from a long-term investment perspective. This could help it to beat the FTSE 100 in the coming years.
Margin of safety
Also offering a wide margin of safety in the resources industry is Kenmare Resources (LSE: KMR). The producer of titanium minerals and zircon released positive half-year results for the six months to 30 June on Monday.
They showed that the company was able to ship 589,200 tonnes of finished products during the period. This was up 10% on the figure from the same period of last year. This helped to push revenue higher by 37% to $140.1m, with higher prices also acting as a catalyst. EBITDA (earnings before interest, tax, depreciation and amortisation) increased by 59% to $47.5m, with net debt falling to $9.3m from $34.1m at the end of 2017.
Looking ahead, Kenmare is forecast to post a rise in earnings of 26% in the next financial year. Despite its positive recent performance and its upbeat growth outlook, it has a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it could offer a wide margin of safety. Certainly, its share price may be volatile. But with a low valuation and what seems to be a sound strategy, its long-term share price growth potential seems to be high. As such, now could be a good time to buy it.
