Stock of the Day - Sims Metal Management (SELL)

Today’s report entails Sims Metal (SGM) which has laid down few updates during its recent annual general meeting. As per SGM’s five year strategic plan, the restructured management team has introduced new perspectives for growth. The Company reiterated that its three step model of Streamline, Optimise, and Grow, sets the roadmap to increase underlying EBIT by more than 350% over FY13. SGM reported that financial results in FY14 entailed underlying EBIT of $119 million which is an increase of 77% over the prior year result of $67 million; and underlying NPAT of $69 million which was three times higher than the prior year. The market conditions were challenging along with cyclical low levels of secondary metal generation, intense competition, and severe winter weather conditions in North America. SGM reported a statutory net loss after tax of $89 million in view of $158 million of significant items, including $100 million in costs relating to restructuring activities in the UK and North America and $23 million in goodwill impairments in relation to SRS in North America. SGM determined to pay a final dividend for FY14 of 10 cents per share, which was fully franked and the Company’s dividend policy to distribute 45% to 55% of NPAT, subject to the discretion of the Board, remained unchanged.


Initial Results in Test Region Tripled Margins during FY14 (Source – Company Reports)

The capital expenditures totaled $64 million (dip from $149 million in the prior year) during FY14. This was owing to the completion of several major projects, including the New England expansion of metals recycling business, and Brooklyn based dedicated facilities for New York City Municipal Recycling contract. The Company could reduce net debt by $196 million in FY14 to a net cash position of $42 million at 30 June 2014. With new projects (such as construction of a shredder in Kwinana, Western Australia), the capital expenditure is nonetheless expected to increase going forward.

SGM’s strategic plan to first streamline the business back to lower cost and higher margin operations, then optimise based on profitability, and grow the total business through reinvestment is underway and is expected to improve EBIT by $32 million per annum, which is believed to be fully realised by FY16. The efforts in the above direction included the exit of the underperforming operations in UK SRS and SRS Canada; and implementation of plans to reduce regional and corporate overhead costs by consolidating the North America metals recycling business into three operating regions (East, West, and Central). The Company expects that optimisation of the business will improve EBIT by a further $130 million per annum by the end of the five year plan.


Streamlining the Business (Source – Company Reports)

In terms of businesses, the Company aims to grow total sales volumes by 10% over the five year plan. In the electronics recycling business, SGM intends to return to growth by expanding its asset management services and exploring its global footprint with multi-national corporates. These may add to a further $40 million per annum in EBIT by the end of the five year plan.

The Company admitted that the gains achieved in FY14 were partially offset by lower sales volumes, which were aggravated by severe winter weather in North America. Underlying EBIT in North America dipped to $13 million in FY14 from $34 million in the prior year. Among others, SGM’s streamline actions in FY14 included the sale of metal recycling assets in Utah and Birmingham, Alabama as well as the idling of the underperforming Mobile, Alabama-based operations.

The Australasia operations continued to be the front-runner performer with underlying EBIT of $86 million in FY14 which was a 64% increase over the previous year owing to the robust performance from Australia Metals and higher income from Australasia SRS and joint ventures. The key highlight here is the new operation relating the Kwinana shredder, which is expected to be operational late in the second half of FY15. SGM further witnessed growth in the small, but expanding, SRS business in the emerging markets of South Africa, Dubai and India.


Electronics Recycling - Footprint Streamlined to Core Profitable Operations (Source – Company Reports)

In Europe, earnings materially improved to an underlying EBIT of $20 million in FY14, from a loss of $19 million in the previous year. The stronger performance from Europe Metals and Germany SRS was though partially offset by lower performance from UK SRS which suffered an underlying EBIT loss.


Global Supply and Customer Network (Source – Company Reports)

External trading conditions, volatile sales demand with falling prices for iron ore and non-ferrous commodities, and low ferrous scrap price forecasts, appear to be a deterrent to a full-blown growth. Despite this, the Company’s financial results to the end of October have been encouraging. Nonetheless, there is some time before we expect SGM’s internal efforts along with completion of new projects outpacing the challenges for prospective gains.


SGM Daily Chart (Source - Thomson Reuters)

Accordingly, we put SELL recommendation for this stock at the current price of $12.01.