Morningstar

Morningstar, Inc.

Equity Bottom-Up

No-moat-rated Sims’ recently revised strategy includes some promising elements. However, we question whether its scrap metals strategy, which will see North American ferrous volumes increase by 40% and non-ferrous volumes double over the coming six years, can deliver value for shareholders. But with much of the new strategy guiding long-term direction, our earnings estimates are unchanged. Therefore, we retain our fair value estimate of AUD 10.10 per share and our no-moat and high uncertainty…

Weak pricing for Zorba, a mixed, nonferrous scrap metal product, and soft sales volumes into China and Turkey impacted no-moat Sims Metal in the second quarter of fiscal 2019. Sims now expects to reveal first-half group EBIT of AUD 110 million next month. Second-quarter fiscal 2019 earnings are expected to be around 25% below the approximate AUD 63 million Sims achieved in the first quarter. With headwinds from Zorba pricing and Turkish ferrous volumes unlikely to abate near term, we reduce our…

No-moat Sims Metal’s revised guidance disappointed the market, but tracks our long-term thesis for the firm. We retain our fair value estimate of AUD 10.10 per share, in spite of the near-term downgrade. Management lowered first-quarter fiscal 2019 EBIT guidance to a range of AUD 58 million to AUD 63 million, down from a previous AUD 73 million. The downgrade relates to soft performance from Sims' joint venture associate, SA Recycling, or SAR, which is now expected to deliver AUD 10 million to…

Robust metals prices and volumes drove a strong fiscal 2018 result for no-moat Sims Metal Management. Sales grew 27%, with revenue of AUD 6.45 billion in fiscal 2018, in line with our expectations. Underlying EBIT was also strong at AUD 279.2 million, 5% ahead of our expectations, with operating margins improving again in fiscal 2018 to 4.3%. While Sims sold off approximately 7% following the result, we still view the stock as expensive, trading at approximately 1.3 times our AUD 10.10 per share…

No-moat-rated Sims Metal Management's share price has come off in recent weeks, sliding more than 13% from June highs of nearly AUD 18.00. We think there is more to come. Now trading at AUD 15.58, shares in Sims still trade at a lofty 54% premium to our unchanged fair value estimate of AUD 10.10. We believe the market is overestimating the sustainability of steel demand within China, as well as the price of ferrous scrap metal.
Analysts: Adam Fleck, CFA and Angus Hewitt

Australia

Sims Metal Management Ltd. collects, sorts and processes scrap metal materials which are recycled for resale. The Company's divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

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