Industrials

Sims benefits from Russia/Ukraine war: Scrap metal prices on a tear

Wed 16 Mar 22, 5:02pm (AEST)
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Key Points

  • Some analysts believe recent share price leap is prelude to further gains by FY25
  • Brokers forecast jump in volumes and scrap metal prices
  • Ukraine war has helped, pushing scrap prices up 20% in past month

As the war in Ukraine stretches on and Russia - one of the top scrap metal exporters - now facing sanctions, the resulting surge in scrap prices has helped to push shares in Sims Ltd (ASX:SGM) to the highest point in a decade and within the range of target prices set by brokers.

Shares in the Australian scrap metals seller surged nearly 25%, to $20.62, after the company last month reported a 622% jump in first half FY22 net profit after tax, to $269.3m, beating analysts’ consensus forecasts by a wide margin.

The company attributed the standout result to higher volumes and prices of scrap ferrous and non-ferrous metals, as well as rigorous cost management.

Higher valuation, but analysts still bullish

But even though Sims current share price is looking decidedly more toppy, some brokers expect the good times to keep rolling in FY22.

Analysts at UBS on March 8 published a note retaining their existing Buy rating, with a target price of $20.30 - above the previous trading day close of $19.09.

UBS expects strong volumes and prices to continue into the second-half of FY22. The broker also expects Sims to boost non-ferrous metal volumes, where margins are heftier.

Mixed response

Goldman Sachs took a similar bullish line in its note, released after Sims’ earnings announcement.

The broker expects circa 5% increased metals volumes compared to the first half, with full-year earnings increasing by nearly a third by 2025 against 2021 levels.

However, other analysts were more cautious, with Macquarie downgrading Sims to Neutral, citing the share price reaction following the earnings result, and the increased risk of Ukraine war affecting key market Turkey.

Turkey depends on Russia for around 33% of its natural gas imports, and interruptions to that supply could diminish demand for scrap there, Macquarie noted.

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Sims has significantly outperformed the Industrials Index over the past 12 months.

What the brokers say

Seven major brokers cover Sims Ltd.

The consensus is a Buy rating, with a target price of $19.7 (-4.8% downside).

Citi remarked that the half-year result was achieved in spite of freight price volatility and other covid-induced uncertainties. Citi noted management guidance of continued earnings strength in the second half, plus an announced share buyback due in the first half. Citi upgraded its earnings and distributions forecast for FY22 and FY23, and maintained its Buy rating, with a $19.50 target price.

Credit Suisse noted that higher iron ore and coal prices played a role in the result by incentivising producers to seek out cheaper scrap alternatives as inputs. The broker upgraded FY22 forecast of Sims’ earnings by 25%, and retained an Outperform rating, with a slightly lower target price of $21.30.

Morgan Stanley noted that Sims’ earnings and pricing are likely near peak cycle, although management pointed to strong momentum in the second half. The broker retained its Equal-weight rating, with the target price moving from $16.50 to $18.

Written By

Ben Seeder

Journalist

Ben is a freelance contributing editor based in Tasmania. He has a Bachelor's Degree in Journalism and Government from the University of Queensland, and is a small-cap stock-picker.

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