Eco Investor August 2014

Pre-Dividend Securities

Sims' Shares Make Strong Recovery

Sims Metal Management's shares have made a strong recovery since 23 July when the company announced the results of its strategic review and a five year plan. In less than a week the shares rose from $10.16 to a two year high of $11.99, an increase of $1.83 or 18 per cent.

Investors clearly liked the strategic plan by new Group chief executive, Galdino Claro. Through internal initiatives, this aims to significantly improve operational performance and lift earnings before interest and tax (EBIT) by 350 per cent over the underlying 2012-13 result.

Mr Claro said the plan will be achieved through a program to drive a higher return on capital without the need for a macroeconomic or cyclical recovery or acquisitions.

That would be a step forward as the scrap metal market and thus Sims is strongly tied to economic cycles.

The plan has three stages: streamlining, optimizing, and growth. Under streamlining, $32 million in EBIT benefits is expected through another round of cost reductions and by exiting loss making operations. Half of this will be achieved in 2014-15 and the full amount by 2015-16. Sims will consolidate seven North American operating regions into three - West, Central, and East. In electronics recycling it will exit its non core and loss making UK SRS and Canada SRS operations and US small scale feeder yards in New Jersey and Dallas.

Under optimizing, it will strengthen its supplier relationships, exploit local and global logistics, share operational best practices, and lead on product quality and services.

Under growth, it will organically grow its market share and expand its feeder yard network, look at how to better service mainland Europe, and continue with selective acquisitions. It wants to return the Global SRS business to growth through asset management initiatives such as expanding the repair, re use and re sale of mobiles; through new corporate services such as secure data destruction for server farms and data storage firms, mobile data destruction services and on site asset management, and by growing emerging markets in Dubai, South Africa and SE Asia.

Mr Claro said the initial results of the plan have been encouraging, and optimization strategies implemented in a North American test region led to three times higher margins during 2013-14.

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There are wide disparities in profitability across its global metals recycling operations, giving wide scope for improvement, and Sims has exited businesses that are outside its long term interests.

No big additional restructuring activities or charges are expected in the Sims Recycling Solutions business after 2013-14.

The big restructuring charges for 2013-14 are expected to be those announced on 24 June of $80-85 million and another $20-30 million in goodwill impairment.

"As we streamline our portfolio we will develop operations where we can best leverage our key competitive advantages of scale, export positioning, and the largest global trading relationship network in the industry," said Mr Claro.

He sees significant scope to further improve Sims' position in both metal and electronics recycling. "As a Company which has grown largely through a long history of acquisitions, we have not yet fully realized the inherent synergies of these transactions. Through sharing best practices across our global footprint and focusing the business back to our core drivers of profitability, I believe significant value and earnings improvements can be generated," he said.

The other big kicker for Sims' share price would be a return to paying dividends - something for investors to keep a careful eye on when it announces its results. (ASX: SGM)

Below: Discrepancies in Sims’ profitabilty across regions.
Middle: Discrepancies in profitability for Sims’ electronics recycling businesses.
Bottom: Sims’ new structure and management.

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