Stock of the Day – Sims Metal Management  (SGM)

While it has proven difficult in assessing the timing when US auto & white goods scrap cycle will lift, key indicators suggest we are on the cusp. We believe FY15/FY16 will mark the beginning of a scrap cycle for both auto and white-goods given: (1) Vehicles aged 11 to 23 years represent a prime scrappage age for the US market with 74% scrapped within this range. (2) More than 50% of the US vehicles in use are more than 11 years old, well up on 41% since GFC in 2008. (3) The strong recovery in new vehicles sales also suggests a scrap cycle looms.


Financial highlights (Source – Company Reports)

US auto and white goods scrap is important to SGN on a number of levels including : (1) account for circa 70% or more of SGN’s mid-cycle US shred feed vs only 50% currently. A return to mid cycle levels will lift shredder utilisation rates asnd therefore leverage on operating costs. (2) have higher non ferrous content which is much higher margin material. (3) The final shredded material results in better quality processed ferrous and non ferrous scrap streams that are more refined and attractive to buyers.


Sales Volume (Source – Company Reports)

The lower feed contribution has two key negative repercussions: (1) lower shredder utilization, (2) Higher competition between metal recycles for auto and white goods scrap. A return to mid cycle conditions will lift shredder utilization rates and therefore opex leverage. SGM’s sales margins will also benefit from reduced competition. Shredding of automobiles and white goods results in better quality processed ferrous and non ferrous scrap streams that are more refined. This is attractive quality to buyers.


SGM Daily Chart (Source – Thomson Reuters)

Over the medium term we expect a gradual improvement in post-consumer scrap arisings that will drive a lift in SGM’s margins. Although demand will remain volatile in the near term, we believe the medium and long term outlook for growth in scrap consumption by key importing economies is positive. As the largest e-waste recycler in the US and the UK/Europe, SGM is well positioned to benefit from growth trends in e-waste recycling stemming from legislation and the commercial benefits to corporates. We put a HOLD recommendation on the stock at the current price.

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