Company Profile – Sims Metal Management (SGM) was created from the merger of two leading metal recycling companies – Australia’s Sims Group and America’s Metal Management. The company is the world’s largest publicly traded metals and electronics recycler, with nearly 70% of its revenue generated in North America and the balance split between Australasia and Europe. The company operates more than 30 shredders and runs processing facilities in more than 20 countries.
Analysis – Sims metal management holds the largest share in a highly fragmented market which has enabled growth from acquisitions and ability to ship tonnage to the fastest growing consumers of scrap metal, Turkey and China. Sims buys ferrous and non-ferrous scrap from metal dealers, manufacturers and those who generate obsolete material – auto wreckers, demolition firms, and railroads and processes it for melting into new products. Its customers include steel mills and smelters of base metals such as aluminium, copper and Zinc. Demand for ferrous and nonferrous scrap materials tends to move in tandem.
Some of the things that have been stated in the recent commentary from the Annual General Meeting of SGM includes positive trends in Australasian earnings, restructuring in the UK metals operations have delivered improved results and that higher scrap prices may or may not translate meaningfully into improved ferrous margins in the North American business due to intense competition for unprocessed raw materials in North America.
Popularity of scrap has increased over the years as primary steelmaking ingredient. Most steel producers these days opt to build a scrap fuelled Electric Arc Furnaces (EAF) rather than integrated, iron ore fuelled mills as there is lower capital requirement and greater operational flexibility. Lately there has been intense competition from pig iron and direct reduced iron which has decreased the scrap mix required by an EAF.
There is a high correlation between Iron Ore and scrap prices. With the long depression in Iron Ore prices till May 2013, iron ore prices have increased 21% compared with scrap which has increased 14%. There is a very high correlation between scrap and Iron Ore prices over the last 5 years. In the scrap business while demand is naturally correlated with industrial activity so is supply. During a recession there is reduced investment and upgrades to capital equipment and hence less scrap is produced. This provides some kind of pricing support when there is weak demand but also Increases Company’s acquisition cost of metal, limiting the effect the higher prices would have on margins. Suppliers would often accumulate obsolete metal during times of weak prices to get better value in good times. Scrap recyclers have little or no pricing power.
The chart shows that over the last two years there has been support around the $8 mark and resistance around the $11.50 mark.
|
Price Performance |
|
|
Price($) |
Price % Change |
|
|
Close: |
10.71 (16-Jan-2014) |
3M: |
6.14% |
|
52 Wk High: |
11.41 (22-Feb-2013) |
6M: |
18.34% |
|
52 Wk Low: |
8.11 (03-Jul-2013) |
1Y: |
7.75% |
Tight scrap supply and excess shredder capacity continue to drive up the acquisition cost of scrap while global demand remains tepid. SGM has little control over its raw material costs and competes on availability and price. With a lower AUDUSD exchange rate, there is a positive impact on SGM’s earnings.
SGM has got lower exposure to regional pockets of weakness through operational flexibility from its network of facilities and access to deep water ports. Scrap is also a more environmentally friendly raw material than iron ore, which should work in its favour as the world grapples with carbon emission standards and energy policy. SGM operates with considerable scale in a fragmented market, giving it a competitive edge and enabling its acquisition strategy.
SGM announced in New York during December that they would be able to accept holiday lights for recycling this season. Both working and non-working incandescent or light emitting diode (LED) lights can be collected at the local Sims Metal Management facility.
Key Ratios:-
|
SGM |
Industry Median |
2013 |
2012 |
2011 |
2010 |
2009 |
|
Profitability |
|
|
|
|
|
|
|
Gross Margin |
27.0% |
16.4% |
14.2% |
16.2% |
18.6% |
16.7% |
|
EBITDA Margin |
22.1% |
0.6% |
1.3% |
4.1% |
4.6% |
2.3% |
|
Earning Power |
|
|
|
|
|
|
|
Pre-tax ROA |
2.3% |
(15.2%) |
(16.8%) |
6.4% |
4.6% |
(2.9%) |
|
ROE |
3.9% |
(22.1%) |
(24.0%) |
6.1% |
4.0% |
(5.3%) |
|
Liquidity |
|
|
|
|
|
|
|
Quick Ratio |
0.76 |
0.87 |
0.82 |
0.96 |
1.06 |
0.90 |
|
Current Ratio |
1.28 |
1.73 |
1.95 |
2.14 |
2.22 |
1.71 |
|
Leverage |
|
|
|
|
|
|
|
Assets/Equity |
2.06 |
1.51 |
1.54 |
1.43 |
1.29 |
1.33 |
|
Debt/Equity |
0.42 |
0.10 |
0.15 |
0.10 |
0.04 |
0.06 |
There are a number of downside risks with SGM namely continued appreciation of AUD/USD, margin pressure on the buy price, a weaker than expected global scrap market, weaker than anticipated growth e-recycling and working capital risks exists if demand expands significantly.
Key figures from the income statement:-
|
Income Statement |
2013 |
2012 |
2011 |
2010 |
2009 |
|
SGM (AUD, Millions) |
|
|
|
|
|
|
Total Revenue |
7,203.1 |
9,042.3 |
8,852.9 |
7,458.5 |
8,641.0 |
|
Gross Profit |
1,180.5 |
1,283.2 |
1,431.9 |
1,384.9 |
1,444.3 |
|
Total Operating Expense |
7,690.1 |
9,686.8 |
8,583.7 |
7,273.8 |
8,763.2 |
|
Operating Income |
(487.0) |
(644.5) |
269.2 |
184.7 |
(122.2) |
|
Net Income After Taxes |
(466.1) |
(622.5) |
187.3 |
121.4 |
(150.3) |
Lately there has been a lot of good news coming out of SGM. First one would be that Perpetual Limited showed confidence in the company, as Perpetual and its related entities increased their person’s votes from 10,332,488 person’s votes to 12,593,510 which represent 6.16% of voting power of the company. Also SGM was recognized as a leader in the ITAD industry by Gartner Inc., the world’s leading IT research and advisory company, in its December 2013 Magic Quadrant for worldwide Asset Disposition.
As a leading metal recycler in a fragmented sector, the company has numerous opportunities for growth and margin improvement if it can successfully scale the business and capture the steel market’s need for scrap. Further the demand for scrap is likely to grow faster than steel demand as additional capacity is more likey to use scrap rather than iron ore for raw material as more areas of the world adopt this new method of production. Hence we put a buy on SGM at the current price.