Sims Group shares had a solid day yesterday with its shares jumping by the most in seven years after the scrap metal recycler said 2008 earnings would beat analysts’ forecasts.
In a statement to the ASX Sims said that, based on results for April and May, full year earnings would top the consensus analysts forecast of $314 million by more than 10% to 15%, excluding significant costs from its merger with US-based Metal Management.
Sims shares jumped more than $4 to a high of $41.45, before retreating to finish $2.08 higher at $39.45.
Yesterday’s intra-day peak of $41.45 is an all time high point for the stock which has ridden the international boom in steel demand and prices, and shaken off fears about the impact of the stronger Australian dollar on its earnings.
Higher scrap metal prices helped Sims to A 29% jump on its 2007 earnings to a record $254.4 million, and the situation seems to be continuing as world steel makers lift steel prices to try and accommodate rising costs of coal, iron ore, electricity and oil and other inputs.
In a short statement to the ASX, the company said
"On 8 May 2008, in conjunction with the release of the Company’s 9 month Earnings, the Company stated that “Earnings (for Q4 FY08) will exceed those in Q3 FY08 prior to any extraordinary expenses or other costs that may be recorded in connection with the Metal Management merger”.
"Following this release, analysts covering the Company updated their full year Earnings forecasts. Based on the consensus of the 10 analysts which updated their forecasts, consensus Earnings for the full year are forecast to be $314m, implying Q4 Earnings of $132m.
"Noting the Company’s unaudited April and May financial results, and the Company’s continuous disclosure obligations, the Company advises that it’s full year Earnings will exceed consensus Earnings of $314m by more than 10-15%, after having made allowance for any extraordinary expenses or other costs that may be recorded in connection with the Metal Management merger."
Also helping drive the price higher was a bullish commentary from brokers, Merrill Lynch.
"We have revised up our scrap prices for the Dec 08 half and ongoing, which has increased headline revenues, and EBIT, on almost unchanged EBIT % margins.
"Scrap prices are driven by pig iron prices, which in turn reflect iron ore and coking coal price rises.
"We are forecasting sustained to rising iron ore and coal prices for the next two years, and have upgraded scrap prices accordingly. Our earnings estimates have increased 5% in FY08, 9% in FY09 and 4% in FY10.
"While we are basing our current price target of $40/sh on our FY09 earnings of $3.28/sh x SGM typical PER of 12x, giving $39.40/sh.
"However, US scrap companies are trading on 14x, probably reflecting the acquisitive behaviour of the US steel producers, and the US register is likely to have a bigger influence in pricing Sims in future. At 14x, Sims would be trading at A$46/sh.
"With the completion of the major mergers with Hugo Neu and Metal Manufacturers, it is very unlikely that Sims will be inactive on the acquisition front going forward.
"Small acquisitions are likely to provide steady ongoing news flow, but Sims is now the largest global scrap exported, and one of the largest independent scrap companies globally. Continuing high scrap prices will enforce mergers, to resolve turf conflicts, changing the structure of the scrap market."
"As one of the major players in this process, Sims can be expected to attract considerable attention, and may be re-rated to growth stock multiples over time."
And it was that final comment which got deal-starved brokers and hedge funds sniffing around looking for a bit of action.
Sims spent $1.7 billion buying Metal Management and $650 million for another US firm, Hugo Neu Corp.
With those acquisitions now complete, Merrill Lynch said it was likely Sims would hunt for other acquisitions, particularly smaller ones, and become an increasingly attractive target itself.
"Continuing high scrap prices will enforce mergers, to resolve turf conflicts, changing the structure of the scrap market,” Merrill Lynch said.
