Ultima United Limited (ASX:UUL), a AUD$1.28M small-cap, operates in the real estate industry which is the most prevalent industry in the global economy, and as an asset class, it has continued to play a crucial role in the portfolios of various investors. Real estate investments typically display unique and attractive investment characteristics relative to other stocks and bonds, especially over a long time horizon. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year, and a low 7.42% growth over the next couple of years. This rate is below the growth rate of the Australian stock market as a whole. Is the real estate industry an attractive sector-play right now? Below, I will examine the sector growth prospects, and also determine whether UUL is a laggard or leader relative to its real estate sector peers. View our latest analysis for Ultima United
What’s the catalyst for UUL’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 previous year, the industry saw growth in the teens, though still underperforming the wider Australian stock market. UUL lags the pack with its negative growth rate of -170.35% over the past year, which indicates the company has been growing at a slower pace than its real estate peers. As the company trails the rest of the industry in terms of growth, UUL may also be a cheaper stock relative to its peers.
Is UUL and the sector relatively cheap?
Real estate companies are typically trading at a PE of 12x, relatively similar to the rest of the Australian stock market PE of 16x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 9.80% compared to the market’s 12.00%, potentially indicative of past headwinds. Since UUL’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge UUL’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? UUL has been a real estate industry laggard in the past year. If your initial investment thesis is around the growth prospects of UUL, there are other real estate companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how UUL fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If UUL 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 UUL’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.
The easiest way to discover new investment ideas
Save hours of research when discovering your next investment with Simply Wall St. Looking for companies potentially undervalued based on their future cash flows? Or maybe you’re looking for sustainable dividend payers or high growth potential stocks. Customise your search to easily find new investment opportunities that match your investment goals. And the best thing about it? It’s FREE. Click here to learn more.