Sims Metal Management

Friday 2nd September 2011

Sims Metal Management (ASX: SGM) has been upgraded to buy from hold by Deutsche Bank with a A$20.55 target. DB says SGM's net profit result for the year to 30 June 2011 (FY11) was about 15% above-view (excluding AUD appreciation), reflecting improved volumes and margin management in the U.S., strong contribution from the e-recycling business and a fall in inventories.

DB notes Sims spent A$105 million on acquisitions in FY11 and expects a similar level of bolt-on acquisitions in FY12. "Based on Sims' very strong balance sheet, DB estimates almost $900 million of acquisitions could be debt funded to remain within the 15-25% target gearing range." DB believes Sims spent around $150 million on its non-ferrous rollout so far "therefore, we believe there could be around A$25million-A$30 million of incremental EBIT as a result of this high returning technology investment."

Credit Suisse also upgrades Sims to outperform from neutral noting the strong second half result. CS increases its FY12-13 EPS forecasts by 0.2% and 7.0% respectively, but cuts its FY14 forecast by 12.9%. CS says "the second half has demonstrated the operating leverage of the business, and plenty more remains as historic volumes are restored and drive higher margins, volumes and earnings while SRS (Sims Recycling Solutions) delivers new growth." CS sets a target price of A$19.

SGM pinned its positive FY11 result on a stronger contribution from its North American metals business during the second half, as the American economy continued to recover, while Australasia and Europe also showed continued strength. Sims Recycling Solutions also reported a strong performance. SGM’s improved results are attributable to improving scrap metal prices in most of its geographic regions in addition to rising demand from steelmakers. SGM’s margins are beginning to improve as scrap metal prices improve, and the company has good exposure to a resurgent US economy. The prospect for its earnings momentum to carry over into FY12 looks promising.

Contact IRG on 0800 437 8489

**A disclosure statement is available, on request and free of charge by calling 0800 437 8489.

Recommendation sourced from the IRESS software trading platform

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