Should You Buy Alumina Limited at This Price?

What happened to the AWC share price?

Alumina Limited [ASX:AWC] has benefited from the recent commodity rally. Overnight, energy prices rose again; oil has finally breached through US$45 a barrel. Today, AWC was up by another 1.8%–1.9%. The stock’s dive over the last few days is showing signs of recovery. The commodity rally continues…for now.

Why did AWC shares do this?

Market analysts have a consensus rating between ‘Hold’ and ‘Outperform’. Most are seeing a decline in sales in 2017 from a forecasted 2016 level. However, the market is expecting positive growth in earnings per share in both 2016 and 2017.

The P/E ratio is not exactly cheap for AWC; it is higher than its peers, at a current level of 35 times. However, the company does pay a handsome dividend, which has also been growing on average over the last five years.

The current ratio is at 6 times, which is more than enough to suggest plenty of liquidity. This is confirmed by the company’s 2.06 times interest coverage. Debt-to-equity is very small for AWC, indicating low solvency risk.

Return on assets is positive, as is return on equity. Although these metrics show the company is below the sector average, it is still doing reasonable at a positive rate.

What now for AWC?

One thing that investors need to remember is that AWC is an alumina producer that supplies to the oversupplied aluminium market in China and around the world as well. Most commodities have a similar story; aluminium is in oversupply due to massive building of capacities over the last decade. That capacity is still very much there.

Like other oversupplied commodities, such as iron ore, alumina rebalancing takes time. It needs time for demand to increase, and for supply to reduce. In that process, prices go into deflation. Are we at a fundamental bottom for commodities? Many argue for and against it. But there is no denying that we are in a technical rally. And it is the perfect rally for stocks such as AWC as far as momentum investors are concerned.

Ken Wangdong

Emerging Market Analyst, New Frontier Investor

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