Welcome to Clime Direct!

Company Update | Sims Ltd (ASX: SGM) leading the way in a circular economy

- 0 Comments - Post New Comment Print Report
spiro_courtis's picture
Analyst: Spiro Courtis ,
  • With elevated scrap metal prices and the COVID-19 disruption continuing to dissipate, SGM is guiding to 1HFY22 earnings before interest and taxes (EBIT) of $310-350m having partially rebounded in FY21 -$57.9m in FY20.
  • Recent one year price return for the stock was approximately 35% and dividends resumed in FY21 at 42cps which is expected to increase by about 40% in FY22.
  • We have a positive long-term outlook for SGM given its strong ESG credentials in supporting the energy transition to net zero by 2050.

SGM is a world leading publicly listed metal recycler, with operations encompassing the buying, processing and selling of ferrous and non-ferrous[1] recycled metals. Their metals recycling operations are geographically diverse, with operations in five continents, including the United States, Australasia and the United Kingdom, comprising a network of processing facilities, many with deep-water port access, supported by an extensive network of feeder yards from which to source recyclable metals. SGM buys ferrous metal from metal dealers, peddlers, auto wreckers, demolition firms and others who generate obsolete metal, and from manufacturers who generate industrial metal. They source non-ferrous metals from manufacturers, known as production offcuts, and from generators of electricity, telecommunication service providers, as well as others, who generate obsolete metal.

Figure 1: FY21 Segment overview*

SGM remains well positioned to leverage off the current favourable industry trends in addressing climate change including decarbonisation of steel and cleaner energy. Management remains positive on the back of continued stimulus spending particularly on steel intensive infrastructure and, in its recent trading update, SGM guided to a 1HFY22 EBIT of $310-350m with analysts expecting a 24% increase of FY22 EBIT to $630mil. This is largely attributable to expected volume increases, elevated scrap metal prices, an upcoming $150m buyback and earnings accretion from its joint venture partner (with a 50% interest), SAR recycling.

As of 16 December, SGM has agreed to acquire the assets of US based metal recycler Atlantic Recycling Group (ARG). The acquisition is expected to reach financial close on 1 January 2022. The transaction provides operational and commercial synergies and is consistent with SGM’s strategy to grow in large coastal markets which offer the potential for top tier processing facilities and bulk optionality.

Although the long term thematics remain sound, in the short to medium term the company remains exposed to freight rate volatility and inflationary pressures on business overheads. There are other heightened macro uncertainties, including lowered Fe (Iron) scrap price expectations (to reach an expected trough of USD 340/tonne) coming off elevated levels, power shortages in the northern hemisphere, slowing global growth and iron ore market weakness from the curtailing of Chinese steel production all of which has weighed on the industry with peers. SGM is trading with a P/E multiple of 20x which is at a 30% discount to the ASX200 Industrials ex-Financials multiple. 75% of SGM’s revenue is from ferrous metal recycling activities and 20% from non-ferrous metals.

Figure 2: Metal - FY21 Volumes*

Since the last update in mid-April, scrap prices have improved in the key markets for SGM. Relative to 2H20 levels, Turkish scrap prices of US$511/t are up 93% while US scrap prices are up 89% to US$463/t. These levels are expected to persist into the first half of FY22 and to soften thereafter reverting to long-run averages in the medium-term.

Figure 3: Markets*

Large increases in FY21 vs FY20 and unprecedented size of global stimulus package

The iron and steel industry is responsible for about 11% of global carbon dioxide emissions and will need to change rapidly to align with the world’s climate goals. Short-term CO2 emission reductions can be achieved through energy efficiency improvements and more scrap-based production. China accounts for about half of global steel production, recently making efforts to close excess steel production including shutting down illegal mills. As population and GDP increase over time, global steel demand will likely recover and continue to increase particularly in developing nations. In a net zero scenario, steel demand is 7% lower in 2030 than current trend levels which still uses coal for 75% of its energy demand.

As the largest metal recycler in the world, SGM is in a prime position to take advantage of the drive to reduce emissions through recycled scrap. Scrap based steel production is lower energy intensive and accounted for 20% of production in 2020 while scrap used with ore-based input production, blended at a rate of 15-20%, improves the energy efficiency and has accounted for ~30% of total steel production. These need to grow to 27% and 40% respectively by 2030 under a net zero scenario. This will be achievable through improvements in scrap collection currently at 85%. Improved scrap collection, enabled by improved sorting methods, will be needed to boost scrap use further and will be especially important in emerging economies.

SGM has been awarded multiple ESG awards due to their enablement of a circular economy through recycling and re harvesting of parts. This has expanded in the IT & cloud computing industry where SGM repurposed 2.1m units in FY21 and sees total addressable market size of 85million units. SGM has also expanded into the waste-to-energy market leveraging off the expertise from joint venture partner LMS energy with plans to install and operate seven plants over the next 10 years with a specific target to generate 50 megawatts by 2025.

Figure 4: SGM’s ESG journey and achievements*