Company Overview - Sims Metal Management Limited is a metals and electronics recycler. The Company operates through four segments: North America Metals, Australia/New Zealand (ANZ) Metals, Europe Metals and Global E-Recycling. The North America Metals segment includes the subsidiaries and joint ventures in the United States and Canada, which perform ferrous and non-ferrous secondary recycling functions. The ANZ Metals segment includes the subsidiaries and joint arrangements in Australia, New Zealand and Papua New Guinea. The Europe Metals segment includes the subsidiaries in the United Kingdom. The Global E-Recycling segment operates as Sims Recycling Solutions (SRS) and includes the subsidiaries, which provide electronic recycling solutions in countries, such as Australia, Austria, Belgium, Canada, Czech Republic, the Netherlands and others. The Company's product groups include ferrous secondary recycling, non-ferrous secondary recycling, recycling solutions and secondary processing, and other services.

 

 

SGM Dividend Details
 
Revenue pressure due to falling commodity prices:Sims Metal Management Ltd (ASX: SGM) reported a 10% year on year (yoy) decline in revenues to $6.3 billion during fiscal year of 2015, impacted by falling ferrous and nonferrous metals prices and decreasing Metals Recycling sales volumes in all its markets. The group’s Australia and New Zealand Metals (ANZ Metals) segment is a major metal recycler in Australasia with over 50 wholly-owned and joint venture facilities across Australia, New Zealand, and Papua New Guinea. ANZ Metals comprises over 17% of the group’s overall sales revenue, with over 1.9 million tonnes of ferrous and non-ferrous secondary metals to domestic and export customers. However, the sales revenue for ANZ Metals plunged over 11% to $1,053 million during fiscal year of 2015 impacted by decrease in ferrous and non-ferrous metals prices coupled with 9% drop in sales volumes as volatile commodity prices hurt the inbound flow of material from more geographically remote areas.


Kwinana, Metal Shredder (Source: Company Reports)
 
The group’s other major segment is Global E-Recycling, which is an electronics reuse and recycling business and has operations across 16 countries. This segment operates under the name of Sims Recycling Solutions (SRS), which offers disposition services for all types of retired electronic equipment to local, national and global customers in every business sector like data centers, healthcare, and financial services. The segment comprised over 13% of the firm’s total sales revenue during fiscal year of 2015 and reported a revenue increase by 5% yoy to $795 million during the period as compared to fiscal year of 2014. This rise is mainly due to better revenues in continental Europe which offset the lower sales in the US.


Performance by segment (Source: Company Reports)
 
Solid bottom line growth despite revenues pressure: Sims Metal Management EBIT (without significant items) rose over 5% yoy to $142 million, driven by solid Europe Metals and Global Electronics Recycling businesses. Europe Metals underlying EBIT surged 49% yoy to $25 million while Global Electronics Recycling business underlying EBIT from continuing operations rose greater than double to $44 million boosted by solid recovery in the Continental Europe and US based operations, higher metallic yields and lower costs. Overall, SGM’s underlying net profit after tax improved by 17% yoy to $102 million on the back of decrease in interest expenses buoyed by solid operational cash flows as well as the group’s divestment of its 16% interest in the Chiho-Tiande Group. Moreover, decrease in effective tax rate to 20% owing to the utilization of earlier unrecognized tax losses also enhanced underlying net profit after tax. Accordingly, Sims Metal Management underlying earnings per share rose by 16% yoy to 49.2 cents during the period. 


Financial Performance (Source: Company Reports)
 
Adopted five-year strategic plan to sustain the ongoing commodity pressure: Sims Metal Management adopted a five year strategic plan via internal initiatives to enhance value with FY15 being the second year post implementation, in order to sustain the challenging economic conditions and commodity prices pressure. Accordingly, Sims Metal Management more than doubled its underlying EBIT to $142 million in FY15 as compared to $67 million in FY13, driven by the group’s streamlining and optimizing efforts. Moreover, falling commodity prices led to decrease in volumes and consequently increased the competition across metal recyclers for raw materials. Sims Metal sold 12.8 million tonnes of material in FY13, while FY14 volumes decreased by 1 million tonnes as compared to FY13; and FY15 witnessed a decrease of 1.3 million tonnes against FY14. On the other hand, the group decreased its fixed cost base and offloaded non-performing assets like electronics recycling facilities in the UK and Canada. Sims Metal improved its supply chain analytic systems as well as invested in downstream non-ferrous recovery technology. Meanwhile, SGM was able to deliver over $103 million in gross margin and fixed cost enhancements in the Metals Recycling operations driven by internal initiatives.  


Five year strategic plan (Source: Company Reports)
 
Balance Sheet Highlights: Sims Metal Management improved its net cash to $314 million in fiscal year of 2015 as compared to the net cash of $42 million in fiscal year of 2014. The group’s strategic initiatives led to a better return on invested capital to 5.5% during FY15, which is a 5.3% increase as compared to the prior corresponding year. But, the group’s capital expenditure rose to $95 million in FY15 as compared to $64 million in the fiscal year of 2014 as the group diverted these funds to several accretive projects like Kwinana - Western Australia’s stage one metal shredder expansion and development of an electronics recycling facility in Norway. SGM reported a fully franked final dividend of 13.0 cents per share in fiscal year of 2015, on track with its dividend policy to distribute 45% to 55% of NPAT.
 
Softness in Outlook: Sims Metal continues to face pressure as volatile commodity prices led to major decline of volumes and prices of secondary metals which are at their lowest level in the past decade. The tough market conditions in China decreased the steel, iron ore, and secondary metal domestic prices due to which several Chinese steel producers enhanced their exports of finished and semi-finished steel leading to decrease in demand for secondary metal. Ferrous prices plunged by 42% to $114/tonne in the first half of fiscal year of 2016 from the time when the group earlier posted their August results. From fiscal year of 2015, metals recycling industry has fallen further leading to decline in volumes during the first half of 2016 leading to underlying EBIT pressure. Management estimates its underlying EBIT to be about break-even during the first half of 2016. On the other hand, to offset the ongoing pressure, the management devised a “resetting plan” which comprises redesigning, closing of non-performing assets as well as intends to further divest facilities. Moreover, Sims Metal estimates its optimization initiatives to deliver better benefits during second half of 2016. Accordingly, SGM expects its resetting plan to generate over $230 million of total significant items including asset, goodwill, and intangible impairment (which includes cash costs of circa $20 million). Therefore, the group estimates its first half of 2016 statutory EBIT to be lower than its underlying EBIT. But, the group estimates its underlying EBIT in fiscal year of 2016 to be better than its fiscal year of 2015 performance. The news to only break even in the first half does bring some negative sentiments for some.


SGM Daily Chart (Source - Company Reports)
 
Bargain opportunity: The shares of Sims Metal Management Ltd plunged over 27.84% in just last five days alone (as of November 13, 2015) on the back of weak outlook reported by management for the first half of 2016. Moreover, the group’s shares have been under pressure from the past few months with the stock delivering a negative year to date return of 42.53% (as of November 13, 2015) and fell over 30.07% in the last four weeks. On the other hand, the group is implementing a five-year strategic plan and is focusing on improving its operational efficiency further. Management estimates that its initiatives would be paid off during the second half of 2016 as compared to the first half. Moreover, the recent correction has placed the stock at very attractive valuation with the stock trading at a relatively cheaper P/E of 13.04x, as compared to its competitors. Sims Metal also has a decent dividend yield of 4.14% and we do see long-term potential in the stock. Further, the strategic efforts by the company seem to help it manage the commodity prices pressure to some extent. Based on the foregoing, we give a “BUY” recommendation on the stock at the current price of  $7.17

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