Sims Metal Management Ltd (ADR) (OTCMKTS: SMSMY) (ASX: SGM) reported a 5.7% decline in revenues to $3.38 billion for the first half of 2015, against $3.59 billion in the first half of 2014. The decrease was mainly due to the declining sales volume, which fell 10.2% on a year over year (yoy) basis impacted by the decrease in secondary metal collection levels. On the other hand, the underlying EBITDA rose 16.2% yoy to $153.5 million during the period, driven by the improved operating income from North America Metals (NAM), Europe Metals and Global E-recycling. The underlying net profit after tax (NPAT) surged 53% on a year over year basis to $64.4 million. Sims Metal Management diluted earnings per share rose to 31.4 cents per share from 20.3 cents per share in first half of 2014.
As per the segment highlights, NAM sales revenues plunged 7.1% to $1.91 billion, from $2.06 billion in the first half of 2014, impacted by the falling sales volume by 12.1% yoy to 3.81 billion tonnes. But, the underlying EBITDA for NAM surged 60.8% yoy to $65.3 million, while the margins improved to 3.4% from 2% in 1H14, driven by the group’s operational efficiency initiatives. ANZ metals sales revenues fell 3.8% yoy impacted by lower sales volumes, and the underlying EBIT declined 23.7% yoy to $29.9 million. Europe metals revenue also decreased 2.6% yoy to $513.2 million during the period. However, the Europe metals division underlying EBITDA rose 49.6% yoy to $21.1 million, with EBITDA margin improving to 4.1% in 1H15 from 2.7% in 1H14, on the back of decreasing selling prices and volumes. Global E-recycling revenues decreased 4.9% yoy to $401.5 million impacted by the exit of UK and Canada E-recycling business on June 2014. But, the underlying EBITDA surged 80.4% yoy to $18.4 million from $10.2 million in first half of 2014, due to improved operating income from E-recycling business in Europe. Meanwhile, the Global E-recycling business reflected the operational losses of $4.3 million from exiting certain operations in UK and Canada.
First half of 2015 performance by segment (Source: Company Reports)
With regards to the sales revenue by product, ferrous secondary recycling decreased to $2.25 billion, from $2.46 billion in 1H14. Recycling solutions fell $401.5 million in 1H15, against $422.3 million. But Non-ferrous secondary recycling managed to witness slight increase of $682.9 million, as compared to $663 million in 1H14.
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First half of 2015 by product (Source: Company Reports)
The group managed to improve its Cash from operations by $15.3 million to $53.1 million during the period, as compared to the corresponding period in 2013, driven by lower interest payments, dividends received from associates and joint ventures. However, the capital expenditure rose to $39.7 million in 1H15 from $29.2 million in 1H14, mainly due to investments in Western Australia for new shredding operations. The acquisitions for the group’s NAM and ANZ metal segment costed $3.5 million during the period, while the SGM received $13.5 million from the proceeds of sale of PPE. Sims Metal had $49.2 million cash position as of December 2014, as compared to $42.3 million in June 2014. Cash dividends of $20.5 million was paid by the group during the period.
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Cash flow performance (Source: Company Reports)
The company had underwent significant management changes during 1H15. Robert (Bob) Kelman, Managing Director of European Metals, retired from the company last month. Kelman had been serving in the group from last year July. However, Robert (Bob) Kelman, would be serving as a consultant for the firm post retirement. Moreover, Galdino Claro, CEO of the company reported that the consulting agreement with Lion Consulting would not extended beyond the expiry date of June 30, 2015. Meanwhile, Michal Lion, who is the present chairman and director of the group’s Asian division as well as sole principal of Lion Consulting had agreed to enter into a new consulting agreement ending on Sept. 30, 2015.
Outlook
SGM shares fell over 9.6% in the month of January due to the falling demand of ferrous scrap. However, the stock had offset these losses, and rallied smartly in the month of February by around 14% on the back of better than expected first half of 2015 results, touching this year’s high of over $12.8. But, the falling iron prices continued to affect the group’s EAF steel mill customers, resulting in the stock decline of over 13.8% in the last three months. Moreover the recent management changes and restructuring process added further pressure with the stock touching its multi-year lows of $8.93 this month.
On the other hand, we believe that SGM stock has the ability to generate returns in the coming months driven by its core strategy and efforts. The group is on track in implementing its five year strategy plan, which was reflected in its efforts of downsizing non-core E-recycling business in UK and Canada, as well as reducing overhead costs in NAM. As a part of its core strategy for the next five years, Sims Metal intends to achieve an underlying EBIT of $321 million by fiscal year 2018.
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EBIT growth forecast (source: company reports)
SGM also implemented a project management office to improve its operational performance in the first half of 2015. The firm sold its 167 million shares to Chiho Tiande Group holding to third parties and received $74 million. Development of recycling facility at Kwinana, Western Australia is estimated to be operational by the end of the fiscal year. SGM offers a dividend yield of over 2.9%. We believe that investors can consider buying the stock, despite falling commodity prices risk.
Accordingly, we put a BUY recommendation at the current price of $9.46
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