Best ASX value buys for the commodities supercycle

Those hunting for ASX share bargains that are leveraged to the commodities boom should be looking at this sector instead.

A compass with the word opportunities is shown in black and blue representing a broker upgrade on the EML share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX mining shares have been on a tear this year and bargain hunters will need to look elsewhere for value buys.

The surge in commodity prices to multi-year, if not record highs, recently have put ASX miners on the winners' podium.

Notwithstanding the recent bout of weakness, ASX mining shares dominate the S&P/ASX 200 Index (Index:^AXJO) leader board for FY21.

These include the Chalice Mining Ltd (ASX: CHN) share price, Paladin Energy Ltd (ASX: PDN) share price and Galaxy Resources Limited (ASX: GXY) share price – just to name a few. These shares have surged by at least 300% this financial year.

ASX value buys lie just outside the mining sector

After such a big run-up for the sector, investors may have to look elsewhere for value buys. The good news is that Jarden knows exactly where you should be looking.

The broker believes that service and equipment providers to miners are undervalued as many have failed to keep pace with commodity bull run.

Discount to asset value not justified

"Concerns around the earnings and margin outlook for the Mining & Infrastructure Services companies have made some investors overly cautious in our view," said Jarden.

"Share prices of the Mining & Infrastructure Services companies are currently trading well below what we view as the equivalent stage in the prior cycle, as determined by their relative valuation to their NTA backing."

Net tangible assets compares the value of a company's hard assets with its market capitalisation. Jarden believes that the discount to NTA for ASX mining services shares is not justified as there are no major differences in the earnings power of their asset base this time.

Best ASX value buys

What's more, industry conditions are currently very supportive of the sector. Capex spend is trending higher, exploration activity is ramping up and commodity prices are stubbornly high.

The best value buys on the NTA measure are the Emeco Holdings Limited (ASX: EHL) share price and Macmahon Holdings Limited (ASX: MAH) share price, according to Jarden.

The Emeco share price is trading at a 13% discount and Macmahon share price is at a 28% discount.

While the Monadelphous Group Limited (ASX: MND) share price and NRW Holdings Limited (ASX: NWH) share price are at a premium, they are trading below their respective historical averages.

Risk-reward favours the bulls

NTA isn't always a good yardstick for ASX shares. In this case though, it works well as mining services companies have to invest heavily in equipment.

"We are positive on the outlook for the sector, despite near-term risks to margins in FY21E from higher labour inflation," added Jarden.

"Despite this, we think the ability to purchase many of these companies at discounts to NTA or discounts relative to historical averages provides ideal risk/reward at this point in the cycle."

The broker has a "buy" or "overweight" recommendation on all the four shares listed above.

Brendon Lau owns shares of Galaxy Resources Limited, Emeco Holdings Limited and Monadelphous Group Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

Investor sitting in front of multiple screens watching share prices
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave the thumbs up to these ASX shares last week. Why are they bullish?

Read more »

Jessica Amir
Investing Strategies

6 ASX shares to buy and hold until the next leap year

These are the stocks to store in the portfolio until the next February 29 rolls around in 2028, according to…

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Broker Notes

These ASX 200 shares could rise 20% to 50%

Big returns could be on the cards according to analysts.

Read more »

ASX shares Business man marking buy on board and underlining it
Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A woman is excited as she reads the latest rumour on her phone.
Broker Notes

Goldman Sachs says this US stock is replacing Tesla in the Magnificent Seven

And no, it's not a tech company. It's in the healthcare sector.

Read more »

Smiling man working on his laptop.
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Broker Notes

3 ASX 200 shares just scored significant broker upgrades. Here's how

The brokers’ bullish assessments for these ASX 200 shares include share price gains of up to 13%.

Read more »

Three miners looking at a tablet.
Broker Notes

Should you buy Pilbara Minerals shares today?

We canvas the experts' views on this ASX lithium stock following last week's FY24 half-yearly report.

Read more »