article 3 months old

Short Term Pain Continues For Sims

Australia | Sep 14 2023

This story features SIMS LIMITED, and other companies. For more info SHARE ANALYSIS: SGM

Short term dynamics forced Sims to issue a profit warning this week, but analysts see a better outlook into the future.

-Sims’ margins pressured on weaker sales and prices
-This week's profit warning sees analysts reduce forecasts and share price targets
-General expectation is for a modest improvement in both scrap pricing and volumes in 2025
-Company is expected to benefit from decarbonisation longer term

By Nicki Bourlioufas

Weight of risk’ remains to the downside

Subdued global demand for steel is leading to lower prices, which could lead to further margin compression for scrap collector Sims ((SGM)), with ‘scrappy’ short-term earnings expected to continue on subdued sales volumes, analysts say.

Sims, a global leader in scrap metal recycling, said this week that with weak market conditions persisting, the company anticipates first quarter FY24 earnings before interest and taxes (EBIT) to be approximately breakeven.

Sims noted increased competition for scrap metal, combined with subdued demand, has squeezed margins, leading to the revised forecast, effectively a profit warning for the company's short term outlook.

Several analysts would not exclude that, in light of the rather sombre outlook, Sims’ share price might well remain under pressure for the time being.

UBS sees a continuation of weakness in the second quarter of FY24 with competition amongst supplies of scrap metal unlikely to abate in the first half of the running financial year. The broker has maintained its Sell recommendation on the stock and reduced its price target to $13.00 from $14.00, with near-term softness likely to persist in the absence of a recovery in US export scrap prices.

Macquarie is equally pessimistic, suggesting the "weight of risk" remains to the downside, as global economic conditions slow. Macquarie says it is too soon to call a bottom for the company and has lowered its target price to $13.30 from $16.20 after slashing earnings per share (EPS) forecasts in FY24 and FY25 by -27% and -3%, respectively.

Macquarie’s principal concern is metal margins are being pressured due to high fixed operating costs (around 80% of costs) while sales volumes are falling. Weakness in the US economy is adding extra pressure on the company's performance.

Jarden's forecast is “scrappy short-term earnings [are] to continue.”

This broker has a Neutral rating on Sims, and reduced its price target to $16.53 from $17.67, concluding “”it is difficult for us to offer a more constructive call with any conviction.”

Jarden prefers BlueScope Steel ((BSL)) across listed steel names given its growing value-add operations in Colorbond and Trucore.  Upside could come to Sims from a recovery in steel demand and pricing linked to an eventual Chinese economic recovery driving scrap demand in Asia, says Jarden.

Longer term outlook supported by decarbonisation

Longer term, the picture could look a lot more positive.

While Citi has reduced its FY24 EBIT estimate by -41% and lowered its target price for Sims to $14.30 from $15.00, the broker has raised its rating to Neutral from Sell, with a modest improvement in both scrap pricing and volume expected in FY25.

Longer term, Citi insists, Sims should benefit from decarbonisation metal requirements. The company is committed to the circular economy and diverts millions of tonnes of material from landfills each year, supporting its role in global decarbonisation.

Goldman Sachs has stuck with its Buy rating on Sims: “Looking at the longer-term trends, we remain positive on the long run demand trend for scrap given an increase in global Electric Arc Furnace (EAF) capacity as the global steel industry decarbonises, and green metals demand and infrastructure spend driving higher steel demand".

Shorter term, Goldman Sachs' price target has fallen by -10% to $15.70 from $17.50 on lower earnings estimates over the shorter term.

Morgan Stanley is equally prepared to look beyond the short term headwinds. This broker is waiting for evidence of improving trends. Morgan Stanley has retained its Equal Weight rating with a $13.50 price target.

This broker's view remains Sims position within the circular economy on top of leverage to a greener global steel industry position the company well to benefit in the medium to longer term. Morgan Stanley believes the current valuation is fair.

Despite the punishment received following this week's profit warning, Sims shares are still up some 6.5% year to date compared to the ASX/S&P200’s gain of circa 2% only, ex dividends.

FNArena's consensus target price for the shares, which is the average for revised targets set by Morgan Stanley, Macquarie, Citi and UBS, currently sits at $13.53, while the shares are trading slightly higher.

Goldman Sachs and Jarden are not included in FNArena's daily monitoring. Both have revised target prices to respectively $15.70 and $16.53, above the aforementioned average.

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