Clean Tech

Sims guides to higher earnings for FY22

Wed 08 Jun 22, 11:13am (AEST)
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Key Points

  • Sims is guiding to higher earning than the company’s FY21 result
  • The company is benefitting from higher metal prices and improved metal volumes
  • Geopolitical & economic uncertainty and the associated volatility expected to remain in to FY23

Sims (ASX: SGM) was up 0.66% at the open after the global leader in metal recycling confirmed underlying earnings for the year ended 30 June 2022 are expected to be in the range of $750m to $770m.

Formerly Sims Metals Management, Sims is a large-cap ($3.5bn) clean tech stock which focuses on buying, processing and selling ferrous and nonferrous metals and operates from more than 200 facilities across 15 countries.

Management advised the market this morning that high metal prices and improved metal volumes explain why the company is guiding to higher earning than the company’s FY21 result.

Management also noted that shipments scheduled to occur close to the year could potentially impact earnings for FY22 or FY23.

Conditions remain challenging

Commenting on today’s brief but meaningful update, CEO Alistair Field reminded investors of how successful the company’s strategy been in navigating the challenging price volatility experienced in the second half of FY22.

“Due to geopolitical and economic uncertainty and the associated volatility, we expect these challenging conditions to remain as we move into the first quarter of FY23,” noted Field.

“We are also closely managing the impacts of freight and logistics volatility, and actively seeking medium-term efficiency gains to assist in mitigating inflationary cost pressures across the company.”

Fundamentals

Growth in trading margins saw the company deliver first half FY22 earnings above guidance.

While underlying earnings of $361.7m at the half year FY22 was 541.3% higher than half year FY21, trading margin increased by 45% due to disciplined management of the buy / sell spread as selling prices increased.

At the half year, management also noted macro-trends there were driving demand for recycled metal. These include:

  • Stimulus spending is increasing demand for steel-intensive infrastructure spending and driving retail consumption.

  • Post consumption scrap is also increasing, which is a positive for both ferrous and non-ferrous metal recycling.

  • Global decarbonisation of steel making, and electricity generation industries.

At the half year, the company undertook to distribute $135.0m in cash payments, 50% of underlying profit, comprising a 41 cents per share dividend and an on-market share buyback equivalent to $54.0m, to be completed in second half FY22.

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Sims: A 12 month share price snapshot.

 

What brokers think

While Sims is up 10.75% for the 12 months, the share price has been losing ground since Goldman Sachs downgraded the company to Neutral rating, with a $21.30 price target on valuation grounds. (15/05/22).

Much of the stock’s share price gains between early February and late April seem to have coincided with a series of share buybacks.

Consensus on Sims is Hold.

Based on Morningstar’s fair value of $20.66 the stock appears to be undervalued.

Based on the six brokers that cover Sims (as reported on by FN Arena) the stock is currently trading with 21.5% upside to the target price of $22.03.

Ord Minnett retains a Buy in Sims (price target $26) and expects steel prices to remain volatile, especially given cost pressures. (18/05/22).

Meantime, between February and April, Citi, UBS and Macquarie have all downgraded Sims to Neutral (target prices $21.60, $22, and $19.20) following the positive share price reaction to the interim result.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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