World domination in less than a century
SIMS Group is a member of that rare group of Australian companies that have ridden globalisation to the peak of their particular business. A series of mergers over recent years has made Sims, which was founded by Albert Sims in Sydney in 1917, the world’s largest scrap metal recycler.
Each year Sims Group feeds the equivalent of more than 100 Sydney Harbour Bridges into its shredders on four continents — and that’s just metal.
Sims recycles metals such as steel, aluminium, copper, ferro- alloys, lead, zinc, tin, antimony and silicon; and plastics, salt, tyres and e- waste’’ — the term for redundant computer equipment, TVs, mobile phones and all other electronic material.
The company’s commodities trading arm distributes a wide range of semi- finished raw material products, through the Sims Metal network, to a variety of industries. Sims also has a 50 per cent interest in LMS Generation, a specialist Australian landfill gas and power generation company that generates more than 150,000 megawatt hours ( MWh) of power a year from 10 sites around Australia.
Through a joint venture with Australian waste and logistics provider Collex ( a business unit of the worldwide Veolia Environnement Group, itself a world leader in environmental services, Sims has become the world’s largest recycler of e- waste.
The extent to which Sims has become a global leader is starkly shown by the fact that it is no longer based in Australia. Since its $ 1.9 billion merger with US rival Metal Management last year, Sims has moved its head office to New York and Metal Management’s chief executive Daniel Dienst has taken charge of the combined entity. Former chief executive Jeremy Sutcliffe now runs the company’s non- US operations.
But in case that looks like a takeover of Sims by Metal Management, Sims shareholders own 70 per cent of the merged entity. Sutcliffe says the move to New York — and his apparent demotion — reflects the realities of where Sims is going in terms of its international expansion’’. Because Sims derives 62 per cent of its earnings in the US, he says, the company needs a chief executive in the same time zone as its main area of operation.
By Sims’s own calculations, the merger creates the world’s largest recycler, processing and trading more than 15 million tonnes of metal a year.
Sims has reached its top- dog status in scrap metal through a strategy to lead the consolidation of the industry. Since 2005 Sims has merged with New York- based scrap producer Hugo Neu group, bought the Chicago- based United Recycling Industries and acquired the end- of- life recycling assets of Noranda Recycling, as well as a number of smaller acquisitions.
The strategy has been a timely one, given the ravenous need of the Chinese economy for iron ore: although China is not a big user of scrap ( it has gone down the blast- furnace path for steelmaking, which uses iron ore and coking coal, rather than the electric arc furnace mini- mill’, which uses scrap), Chinese demand for iron ore has had flow- on effects in the scrap markets as world steelmakers fight to secure supply of raw material.
Scrap is also increasingly popular on environmental grounds: scrap does not have to be mined, and steel made from scrap uses only one- third as much energy as that produced from iron ore. Because of these factors, the steel scrap price has been pushed to record levels, well beyond the point where using scrap metal makes sense for many mills.
In January 2006 the bellwether No. 1 heavy melt scrap ( HMS) grade fetched $ US215 a tonne. By January 2008 it traded at $ US390 a tonne; last month, the price had hit a record high of $ US650 a tonne. Auto factory scrap costs even more: it has risen about 70 per cent since March, to as high as $ US710 a tonne.
Sims is benefiting hugely from these prices. Four years ago, in the 2003- 04 financial year, it earned net profit of $ 119 million: its profit for the three months ending March 31 2008 came in at a record $ 80.3 million ( up 46 per cent on a year ago) and it is expected to earn about $ 320 million for the full year, compared to $ 254 million in 2006- 07.
Not surprisingly, the share price has followed a similar trajectory to the profit growth: from $ 11 in mid- 2004, it has risen to $ 35.
Sims itself is confident of the good times continuing in the short term at least. Chief executive Daniel Dienst is forecasting a strong outlook for the final quarter of the financial year, saying earnings will exceed that of the third quarter, as the company gets the benefit of its first full- quarter of earnings contribution from Metal Management.
While the strength of the Australian dollar and higher freight rates to transport its product remain headwinds for the company, Dienst says strong prices for ferrous scrap globally are more than offsetting the stronger Australian dollar, demand and pricing from consumers for Sims’ ferrous and non- ferrous metals is robust, and freight rates have stabilised — albeit still at historically high levels. This all supports the company’s expectation for continued attractive operating conditions’’ through to the end of the financial year. For a company as conservative as Sims in the guidance it gives the market, that is tantamount to whooping it up.
Darren Grubb, analyst at Intersuisse, says market conditions mean that the fourth quarter will be another record’’ for Sims, but adds that the company is unable to provide more precise estimates given the unprecedented volatility’’ in scrap prices and freight prices in recent quarters.
Grubb notes that sales tonnages for the nine months of the financial year so far are up only 3 per cent, meaning that most revenue growth has come from high scrap prices — and while he likes the long- term outlook for both ferrous and non- ferrous prices, with rising iron ore and coking coal prices encouraging substitution into scrap metal, he cautions that scrap prices are volatile, and will not rise forever in a straight line’’. While Sims has been a good trade’’, Grubb says that some caution is required’’ after a 49 per cent rally in the stock price this year. He rates the stock as an accumulate’’.
Simply put, Sims is paying the price for its success, in a fully valued share price. At $ 35, Sims is trading at about 18 times expected earnings, compared to its long- term historical average of 11 times. Broker Citi says that this discrepancy is two standard deviations above its historical price/ earnings ( P/ E) ratio — making the stock over- valued.
While conditions for Sims continue to be positive, says Citi, this is more than factored in’’ to the current share prices, making the stock expensive — particularly as it is trading on peak cycle earnings’’. Citi also sees further margin pressure building, given that Sims’ market is an increasingly competitive arena: the broker notes that its margins have been slashed in half since 2004.
Brass from muck: Sims recycles metal, and a host of other materials. The company has expanded internationally and now has its headquarters in America