The resources industry remains high risk. Although the prices of commodities such as oil have risen this year, they’re still a long way from recovering to previous highs. However, potential rewards are also high and Aminex’s (LSE: AEX) update today provides clues as to whether it’s a better buy than resources peers Glencore (LSE: GLEN) and Amec Foster Wheeler (LSE: AMFW).
Aminex’s update is positive as the company has received first payment in relation to gas produced from the Kiliwani North-1 well in Tanzania, which was supplied to the Tanzania Petroleum Development Corporation. Investors have reacted positively to the news, with Aminex’s share price up 5%.
Looking ahead, it’s expected to deliver significantly improved financial performance over the next two years. Following several years of losses, the company is forecast to move to profitability in the current year. In 2017, its pre-tax profit is due to rise from £0.3m to £4.3m, which has the potential to positively catalyse investor sentiment.
Despite Aminex’s share price having risen by 30% in the last three months, its upbeat outlook doesn’t seem to have been priced-in by the market. It trades on a forward price-to-earnings (P/E) ratio of 8.4, which indicates that there’s significant upward rerating potential.
Better bet?
However, it’s not the only cheap resources stock. Amec Foster Wheeler has a P/E ratio of 10 and is expected to return to profitable growth in the next financial year. This follows a troubled period for the business that has seen its earnings fall in each of the last two years, largely in response to the falling oil price. But with a new strategy that has improved its efficiency, Amec Foster Wheeler looks set to make a strong comeback.
Similarly, Glencore’s debt reduction strategy is likely to lead to an improved financial outlook for the diversified resources play. It has made asset disposals and has reduced costs so that it’s expected to record a rise in earnings of 57% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of only 0.5, which like Aminex and Amec Foster Wheeler, indicates significant upward rerating potential.
However, where Glencore and Amec Foster Wheeler have a clear advantage over Aminex is with regard to their risk profiles. They’re both much larger, better diversified and have track records of profitable growth. This means they offer lower risks than Aminex and still have significant potential rewards. As such, buying Glencore or Amec Foster Wheeler is a better option for risk-averse investors.
In terms of Amec Foster Wheeler and Glencore, the former has a much stronger balance sheet and doesn’t have to make wholesale changes to its capital structure. Certainly, Glencore is making excellent progress on the debt reduction front, but there’s still a long way to go. And with Amec Foster Wheeler yielding 4% from a dividend that’s covered 2.5 times, it offers superior income prospects to Glencore’s suspended dividend. As such, Amec Foster Wheeler is a superior investment to Glencore.