Morningstar | No-Moat Sims’ Fiscal 2019 Forecasts Reduced After 1H Earnings Disappoint; FVE Unchanged
Weak pricing for Zorba, a mixed, nonferrous scrap metal product, and soft sales volumes into China and Turkey impacted no-moat Sims Metal in the second quarter of fiscal 2019. Sims now expects to reveal first-half group EBIT of AUD 110 million next month. Second-quarter fiscal 2019 earnings are expected to be around 25% below the approximate AUD 63 million Sims achieved in the first quarter. With headwinds from Zorba pricing and Turkish ferrous volumes unlikely to abate near term, we reduce our full-year fiscal 2019 EBIT forecast by 16% to AUD 203 million. But our long-term expectations for Sims are unchanged and we maintain our AUD 10.10 per share fair value estimate. With Sims shares off near 50% since June 2018, they appear fairly valued for the first time in three years. Despite this, a margin of safety still doesn't exist and we require further share price weakness before considering investment.We've reduced our fiscal 2019 EBIT forecast for the European metals segment from AUD 20 million to AUD 3 million, reflecting near-term Zorba pricing and ferrous volume headwinds. Volumes were negatively impacted by Turkish customers’ requirements for higher-quality ferrous scrap. Sales volumes of scrap products into China have also been impacted by China's "National Sword" policy, aimed at reducing imported waste materials. Segment volumes fell 5.1% to 770,000 tonnes in the first half. Further, margins were negatively impacted by reduced Zorba pricing. Sims now expects first-half fiscal 2019 segment EBIT of AUD 1.4 million segment.
We’ve also reduced our EBIT expectations for Sims’ North American operations by 18% to AUD 102 million with Zorba prices also impacting SA Recycling, Sims’ North American joint venture. SA Recycling’s margins contracted, with U.S. shredder feed prices unresponsive to the near-40% reduction in Zorba pricing during the half year. Sims now expects an EBIT contribution of AUD 16.8 million from SA Recycling in first-half fiscal 2019.
Sims Metal Management buys, processes and sells ferrous and non-ferrous recycled metals and provides environmentally responsible solutions for the disposal of post-consumer electronic products, including information technology assets recycled for commercial customers. Co.'s product groups are: ferrous secondary recycling, which collects, processes and trades iron and steel secondary raw material; non-ferrous secondary recycling, which collects, processes and trades other metal alloys and residues; recycling solutions, which disposes post-consumer electronic products; and secondary processing and other services, which focuses on melting, refining and ingoting of certain non-ferrous metals.
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