Sims Metal Management Limited

Slump in Commodity Prices Affected Near-Term Outlook:Sims Metal Management Limited (ASX: SGM) operates in purchasing, manufacturing and selling, and distribution of ferrous and non-ferrous metals. SGM is also engaged in the provision of environmentally responsible solutions for the disposal of post-consumer electronic products, including IT assets recycled for commercial customers. The company is one of the world’s largest metal and electronics recyclers with over 250 facilities, including joint ventures operations, in 18 countries, and circa 5,000 employees globally. Recently, SGM informed that it has exercised its option by issuing fully paid ordinary shares of 77,683 unit under the Sims Metal Management Long Term Incentive Plan.

FY19 Financial Highlights:Sims Metal Management Limited announced its FY19 results for the year ended 30 June 2019 wherein SGM posted a revenue of $6,640.0 million, up 3% on y-o-y. Underlying NPAT came in at $161.9 million, down 14.2% on FY18. Underlying EBIT was down by 16.3% y-o-y at $230.3 million. The business reported sales volume growth across ANZ Metals and flat volumes in North American Metals. The profitability of the company was affected by a drastic fall in non-ferrous shred sales price than shredder feed buy price, and higher domestic prices in the USA, creating competition for scrap in some areas.

The Board of Directors announced a fully franked dividend of AUD 0.19000000 for each ordinary share held, payable on 18 October 2019. The annual dividend yield for the stock stands at 3.34%.

Outlook:As per the Management guidance, the significant fall in the commodity prices of ferrous and non-ferrous in the recent past will negatively impact H1FY20 and the result for the period is expected to remain materially lower than H1FY19. Due to on-going concerns related to the trade war, demand for steel and aluminum remains drastically lower. Automobile sales also continue to be under pressure causing a plunge in demand and volumes.


Ferrous pricing chart (Source: Company Reports)

Stock Recommendation:The stock of SGM is quoting at $10.900 with a market capitalization of $2.55 billion. The 52-week trading range of the stock stands at $8.910 to $13.870. The stock has generated healthy returns of 25.83% and 15.32% in the last three-months and six-months, respectively. Near-term scenario of the non-ferrous metals is likely to remain bleak on account of weak global demand. Scrap purchases are also expected to remain low due to the lower demand from steel producers.  Considering the recent price movement of the stock and weak trading update for 1H20 due to significant fall in ferrous and non-ferrous prices, escalating issues related to trade war, etc., we have a watch stance on the stock at the current market price of $10.900, down 13.286% as on 16 September 2019 on account of lower H1FY19 guidance by the Management.
 

BlueScope Steel Limited

Continue to Shine Despite the Challenging Environment:BlueScope Steel Limited (ASX: BSL) is involved in the production of metal coated, and painted steel building products across the Asia-Pacific region. The company manufactures and markets a wide range of branded products that include pre-painted COLORBOND® steel, zinc/aluminum alloy coated ZINCALUME® steel and the LYSAGHT® range of building products. Recently, BSL announced that it has cancelled buying 7,08,477 shares for a consideration of $90,46,058.46.

FY19 Financial Highlights:BSL announced its full-year results for FY19 for the period ended 30 June 2019 wherein the company reported sales of $12,532.8 million, up 9% on y-o-y while underlying NPAT came in at $966.3 million, an increase of 17% on FY18. The business was positively impacted by the higher steel prices across all the segments, combined with favorable translation impacts from a weaker Australian dollar exchange rate. Underlying EBIT for BSL stood at $1,348.3 million, 6% higher than FY18, primarily driven by higher spreads with steel prices rising more than raw material input costs and partly offset by higher costs. Profitability was supported by underlying EBIT combined with lower financing costs and outside equity interest.


FY19 Financial Highlights (Source: Company Reports)

The Board of Directors has announced an unfranked dividend of AUD 0.08000000 for each ordinary share held, payable on 16 October 2019.

Outlook:For H2FY20, BSL expects weaker commodity steel spreads across North Star and ASP (Australian Steel Products). The Management is expecting an underlying EBIT of 45% lower than the second half of FY19 at $499 million. Expectations are subject to spread, FX and market conditions.

Stock Recommendations:The stock of BSL is trading at $12.630 with a 52-week trading range of $10.305 to $17.430. Currently, the stock is trading below the average of its 52-week high and low prices. The stock has generated a return of 12.46% and -6.36% in the last three-months and six-months, respectively. The stock is available at an Enterprise Value to Sales of 0.5x on Next Twelve Months (NTM) basis as compared to the industry median of 1.5x. BSL is a global leader in coating g and painting for building and construction markets and operates in the world’s two largest construction markets of China and US, and high growth markets in ASEAN and India. The company enjoys a strong balance sheet with the target of zero net debt and distribution of at least 50% of free cash flow to shareholders. BlueScope is well positioned in robust, developed economies, and in high growth regions across Asia. The stock has generated a negative return of 22% during the last one-year, impacted by falling commodity prices, low expectations from the steel sector, etc. Despite the short-term macro challenges, the mid-term scenario remains stable. Considering its position in the industry, global footprints in different geographies, decent results for FY19 on the face of a challenging environment, etc., we recommend a ‘Buy’ rating on the stock at the current market price $12.630, down 1.482% as on 16 September 2019.

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.