Sims Metal Management Ltd

 

SGM Details 
Mixed Market Update: Sims Metal Management Ltd (ASX: SGM) stock fell 5.66% on January 20, 2017 at the back of some negative market sentiments post its recent market update. The group now expects 1H FY17 underlying EBIT to be between $75 million and $79 million. 1H FY17 underlying EBIT is said to be a material improvement on previous guidance of underlying EBIT being similar to 2H FY16 of $63 million. However, SGM has stated that volatility in the price of coking coal, instability in Turkey, and winter weather challenges in North America need to be watched owing to their prevalence during 3Q FY17.
 
Focused on costs to offset the top line pressure: SGM has been focusing on their costs to combat the top line pressure. The group’s controllable costs fell by $137 million, leading to a 17% lower sales volume break-even point of the business. Accordingly, the group improved from their underlying NPAT loss of $18 million in the first half of FY16, to a net profit of $56 million in the second half of FY16. SGM is aiming for a return on capital of 10% or more by FY18. The group had a decent net cash position of $242 million at 30 June 2016 and had bought back over 8 million shares in fiscal year of 2016 as a part of their buy-back program at an average price of $7.59 per share. SGM even paid a final dividend of 12 cents per share during fiscal year of 2016. Meanwhile, the group’s optimization initiatives would continue to be implemented in the coming two years.
 
Despite growth efforts overall performance pressure continued: SGM reported an 18% decrease in their sales volumes in FY16 while their underlying NPAT plunged 63% year on year (yoy) to $38 million during the period. Oversupply of low-cost iron ore led to the ferrous scrap decline by over $30 per tonne during October 2015 which is the lowest level as compared to 2003 levels. Fiscal year of 2016 performance was impacted by a 40% ferrous scrap price reduction and a 33% contraction in their sales volumes, similar to the volume decline across their key market.

 

SGM FY16 performance (Source: Company Reports)
 
Recommendation: SGM’s stock rallied over 97.85% in the last one year (as of January 19, 2017) and we believe investors can book their profits in the stock now. The group witnessed a major hit late last year and was not able to recover for some time. Slowdown in the domestic steel consumption in China led to excess production into global markets. Despite the recent recovery in the commodity prices, the demand situation might still suffer at the back of macro-economic factors. Further, SGM is currently trading at a relatively higher P/E and has a moderate dividend yield. We recommend a “Sell” for the stock at the current price of $ 12.17, ahead of their interim 2017 results which would be released in February 2017.

 
SGM Daily Chart (Source: Thomson Reuters)

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