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.
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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.
