Sims (ASX.SGM) has provided a trading update and guidance for fiscal 2026 earnings. It expects underlying EBIT of $350 million-$400 million. This is more than double the prior year, due to higher nonferrous prices and growth in the electronics and computer recycling business. Shares were up 9%.

Why it matters: We had already anticipated strong earnings growth in fiscal 2026, but this is better than expected, and we lift our fiscal 2026 underlying EBIT estimate by 50% to the midpoint of guidance. The upgrade is mostly driven by data center demand for metals, benefiting the North American metals businesses and the electronics and computer recycling business.

  • Almost half of earnings guidance is from its electronics and computer recycling business, guided to contribute to the fiscal 2026 adjusted EBIT of about $175 million, from $33 million in fiscal 2025. Growth is supported by new operations in Ireland, in addition to the US.
  • Elevated copper and aluminum prices are driving profits in the North American operations. These are needed for data centers, electric vehicles, renewable energy, and electronic goods. Nonferrous metals comprise about 9% of sales volumes but are Sims’ highest-margin product.

The bottom line: We raise our fair value estimate by 8% to $17 per share for no-moat Sims Metal Group. Despite the upgrade, shares are about 20% overvalued.

  • We think the market is extrapolating high prices into the future. Our estimates assume elevated prices for ferrous scrap metal, aluminum, and copper over the near term, due to high demand and relative scarcity. But we expect prices to normalize by our fiscal 2030 midcycle.
  • Sims’ capital-light electronics and computer recycling business has low barriers to entry, and high demand from data centers is likely to encourage investment and new entrants. Consequently, we forecast price and EBIT margin to be lower from fiscal 2027 as competition intensifies.

Sims primed for growth in artificial intelligence

We expect increased demand for scrap metals over our forecast period, driven by growth in electric arc furnaces, spending on infrastructure, and steel and copper as the main materials in vehicles, electronics, and machinery.

We estimate that at least 70% of US-manufactured steel is produced in an electric arc furnace, driven by decarbonization of steelmaking and improvements in technology. These mills use up to 100% scrap metal as opposed to basic oxygen furnaces, which generally use about one-fifth scrap.

We also expect an increase in metal-intensive infrastructure, underpinned by the US government’s USD 1.2 trillion Bipartisan Infrastructure Deal, representing about double normal policy spending. Steel and other metals, such as copper, are also an essential input in machinery, automobiles, and consumer goods and we do not see growth in these being materially displaced by alternative materials.

The US government’s tariff on all imported steel and aluminum, from March 2025, does not include scrap metal. However, about one-fourth of US steel consumption is imported, and we expect this to be curtailed, with more steel domestically manufactured to avoid tariffs. We think this is a tailwind for Sims as the largest supplier of scrap metal. Its plants are currently underutilized, and we think it is well-positioned to increase domestic scrap volumes in line with rising domestic demand. We expect tariffs to be in place until the end of the current administration’s term.

After reporting a segment loss in fiscal 2024, the US business removed costs and repositioned itself as a domestic seller and exporter, from being an exporter previously. We support this strategy with domestic prices likely to improve given the tariff backdrop, while maintaining the option of exporting. However, segment earnings improved from fiscal 2025 as it reduced overhead costs and gained domestic customers. To this end, we expect a near-term improvement in prices and margins, albeit short-lived, with normalized prices and volumes from fiscal 2029, as higher prices encourage new entrants and investment, reducing returns for all players.

Bulls say

  • Growth in electric arc furnace production is driving demand for scrap steel as the main input of EAF produced steel.
  • Ferrous and nonferrous metals are essential materials in the construction, automobile, technology, consumer, and industrial sectors, with near-term growth expected by increased public and private spending.
  • We anticipate tariffs on US steel to increase demand for US domestically produced steel in the medium term, with Sims, as the largest national player, well-placed to supply scrap metal.

Bears say

  • Scrap processing is a low-margin industry characterized by fragmented supply and low barriers to entry.
  • Ferrous scrap metal can be substituted by direct-reduced-iron and other feedstocks increasing competition if these alternatives become cheaper than scrap.
  • Scrap metal companies are price takers, with prices tied to supply and demand of scrap metal and alternatives.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.