Outlook Not Too Flash For Sims Metal

This story features SIMS LIMITED. For more info SHARE ANALYSIS: SGM

-Scrap prices ease into FY year end
-US scrap export constraints

By Eva Brocklehurst

Sims Metal Management ((SGM)) is between a rock and a hard place. Steel price strength in the US market is being supported by trade protection policies but the scrap market – and raw materials for that matter – is exposed to broader global supply/demand factors.

Deutsche Bank recently downgraded the stock to Hold from Buy, suggesting the scrap market is in stalemate. Some yards have closed but the broker believes there are still too many, and market rationalisation is taking too long. The broker accepts Sims Metal is doing what it can to improve its cost position, noting the balance sheet is still strong.

Deutsche Bank visited the US recently and notes US supply constraints remain in place, with limited ferrous volumes being exported to Turkey. Prior to a deep sea ferrous scrap deal in the first week of June, Turkish bulk scrap cargo exports have not occurred since early May. US ferrous scrap exports for January to April 2016 have declined 20% and the American Metal Market reports suggest the most recent cargo export was at a US$95/t discount to May 2016 prices.

Given the increase in scrap prices in April and May, the June quarter appeared to be more robust, but June prices have since retraced. Hence, the broker lowers forecasts for Sims Metal sharply for both FY16 and FY17. Macquarie also suspects the short-lived improvement in scrap prices is unlikely to have been enough to re-invigorate volume intake on a sustainable basis.

Credit Suisse calculates the company's intake is possibly sourced from peddlers, as opposed to dealers, by as much as 20-25%. Peddler volume is the most price-sensitive feed, with other sources being materially less volatile on the back of price gyrations.

The broker was disappointed by the company's May guidance, which appeared consistent with a bearish FY16 forecast and a recovery into FY17. The upswing in prices and volumes in the weeks leading up to the May presentation appear to have had no positive impact on the company's earnings expectations. Credit Suisse was suspicious at the time that this likely foreshadowed an adjustment in scrap prices in the last six weeks of the financial year.

The broker also observes the company's loss-making Central division is still to be divested and would be surprised if this accounted for any more than 3-5% of total first half annualised tonnage of 8.4mtpa. There are two Buy ratings and five Hold on FNArena's database for Sims Metal. The consensus target is $8.41, suggesting 9.9% upside to the last share price.
 

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