Morningstar | Non-Ferrous Prices Impact Sims Metal in 1H 2019; FVE Unchanged. See Updated Analyst Note from 20 Feb 2019
No-moat Sims Metal’s delivery of AUD 110 million in underlying EBIT in first-half fiscal 2019 was a foredrawn conclusion, having announced the result. While ferrous pricing was favourable, weak zorba prices which have fallen near 40%, led to a less positive second quarter. While Sims sees some improvement thus far in the second half, our outlook remains unchanged with full-year EBIT AUD 202 million expected. We retain our longer-term bearish view on scrap prices and continue to expect operating margins of about 2.5% in fiscal 2023, down from 4.0% in fiscal 2018. Our fair value estimate of AUD 10.10 per share remains unchanged. Sims' shares currently screen as slightly expensive, trading at a 12% premium to our valuation.While ferrous prices held steady, plummeting zorba prices and unresponsive feed prices impacted Sims’ North American, or NA, result. SA Recycling, Sim’s NA joint venture, was most impacted and saw its EBIT fall 33% to AUD 16.8 million. This result dragged total NA operating income 18% lower to AUD 48.8 million. We continue to expect little improvement in the second half and forecast full-year NA EBIT of AUD 102 million.
Zorba pricing also hit the European, or EU, segment, while soft ferrous demand from Turkish customers seeking out higher-quality scrap, also impacted. Meanwhile, Chinese demand was a further negative. EU volumes fell 5.1% in the first half, delivering an operating loss of AUD 0.9 million. However, we expect a modest recovery in volumes in the second half to drive an improved second-half EBIT, and forecast EU EBIT of AUD 3 million for the full year.
While demand from Australian steel mills was robust, Australia & New Zealand, or ANZ, margins slipped to 7.1% from 8.4% on declining non-ferrous pricing. ANZ EBIT of AUD 43.9 million was 0.7% lower than the prior year. Zorba pricing was again the major driver of the lower result. With volumes expected to ease after a strong first half, we expect full-year ANZ EBIT of AUD 74 million.
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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