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Sims Metals stocks dive after earnings disappointment

Emma Rapaport  |  22 Jan 2019Text size  Decrease  Increase  |  
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Stocks in metals and electronics recycling giant Sims Metal Management plunged 16 per cent yesterday after the company released a disappointing first-half earnings update and warned of challenging conditions ahead.

Sims (ASX: SGM) expects to reveal first-half earnings before interest and tax of $110 million next month.

The update is 12 per cent lower compared to the fist-half fiscal-2018, when the company brought in underlying earnings before interest and tax of $125 million.

"The first half has been challenging for all recycling companies globally and will continue to be so for the near future," Sims chief executive and managing director Alistair Field said in an ASX earnings update.

"We are meeting these challenges and will maintain our focus on capitalising on our strengths and on improving out underperforming businesses."

At close the yesterday, Sims stocks had tumbled 16 per cent to $9.22.

Morningstar director of equity research Adam Fleck says weak pricing for Zorba, a mixed, nonferrous scrap metal product, and soft sales volumes into China and Turkey hurt the company in the second quarter of fiscal 2019.

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"Volumes were negatively impacted by Turkish customers' requirements for higher-quality ferrous scraps," Fleck says.

"Sales volumes of scrap products into China have also been impacted by China's 'National Sword' policy, aimed at reducing imported waste materials."

Sims placed blame on market volatility, spurred by uncertainty surrounding tariffs, trade wars and Turkey's position in the market, among other things, for the weaker result out of North American Metals.

Fleck believes headwinds from Zorba pricing and Turkish ferrous volumes are unlikely to abate near term.

As such, he has reduced his one-year fiscal-2019 earnings before interest and tax forecast by 16 per cent to $203 million.

His long-term expectations for no-moat Sims, however, remain unchanged. He has left his $10.10 per share fair value estimate on hold, making the stock appear fairly valued.

"With Sims shares off near 50 per cent since June 2018, they appear fairly valued for the first time in three years," Fleck says.

However, he says a margin of safety doesn't exist and further share price weakness is needed before considering an investment.

Yesterday's announcement comes ahead of the company's first-half results, which are scheduled to be released on February 20.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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