Sims Metal Management

Transcription

1 AUSTRALIA SGM AU Price (at 10:44, 15 Feb 2017 GMT) Outperform A$12.14 Valuation A$ - DCF (WACC 8.3%, beta 1.4, ERP 5.0%, RFR 3.3%) month target A$ month TSR % Volatility Index High GICS sector Materials Market cap A$m 2, day avg turnover A$m 14.9 Number shares on issue m Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m 4, , , ,362.6 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x SGM AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2017 (all figures in AUD unless noted) 16 February 2017 Macquarie Securities (Australia) Limited Self-help getting the upper hand Event (SGM) reported 1HFY17 results at the middle of the pre-guided range of EBIT between $75-79m. Impact Operationally geared. Revenue was down 1% to $2.39bn (MQe: $2.8bn), while sales volumes were up 1% YoY. Constant currency revenue grew 5.9% YoY. Underlying EBIT came in at $77m, up significantly over the depressed 1HFY16 of -$7m and Underlying NPAT was $60.0 (MQe: $57.4m), up from a loss of $17.8 in the pcp. North America swings. North America Metals EBIT came in at $30.7m (MQe: $33.0m). Restructuring has resulted in a significantly improved cost position and operational leverage metal margins were up 5.7% and controllable costs down 3.7%. ANZ strong. ANZ metals rebounded from a weak 1HFY16 base, with an 85% improvement in EBIT to $25.9m (MQe: $22.1m). Again, a better volume environment (up 23% YoY) supported trading outcomes, with metal margins up 16%. Europe Metals also bettered our expectations, with EBIT of $15.8m (MQe: $12.4m). Weak cash, driven by prices. Cash from operating activities declined $25m YoY, principally due to working capital movements. While physical inventory was down 35%, recovering prices drove a $23m working capital release in 1HFY17 ($103m in pcp). Annualised return on capital in 1HFY17 came in at 6.8%, with a FY18 target of 10% remaining. Market volatility versus self-help. Market conditions remain volatile. With lower risks of growing Chinese exports and higher iron ore and steel prices, scrap metal velocity should be past its worst. A lowered break-even point means 500ktpa (+6%) in volume can deliver $40-50m (30%+) in EBIT (SGM estimate). Earnings and target price revision We have adjusted FY17 and FY18 by 8.9% and 6.5%, respectively, to reflect further self-help initiatives. We raise our target price on a SOTP basis to $13.60 ($11.20 previously), which reflects a re-rating of multiples, crediting strong operating leverage. Price catalyst 12-month price target: A$13.60 based on an EV/EBIT methodology. Catalyst: Steel industry data. Action and recommendation Upgrade to Outperform. The market environment is far from clear, but SGM has done a good job of mitigating downside risks by aggressively paring costs. The group envisages further self-help initiatives that on a FY run-rate basis could add 50%+ to EBIT. On the strength of self-help improvements, we upgrade our opinion to Outperform from Underperform. Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Macquarie Wealth Management Analysis Fig 1 Results review The good The not-so-good The interesting Operational leverage evident. Selfhelp has resulted in Sims lowering its break-even volume to 7mtpa a decline of 41% since FY13. This is delivering significant profitability leverage to any improvement in volume. Volume stabilising. In aggregate, sales volume grew 1% YoY. This masks a 9% decline in North America owing to facility closures. Volumes grew by 23% in ANZ and 25% in Europe. More broadly, Sims point to gradually improving US ferrous scrap collection volumes since mid Balance sheet strength. Sims balance sheet remains in a net cash position reflecting management s conservatism. Solid dividend. The group declared a $0.20ps (MQe: $0.15ps) dividend. Source: Macquarie Research, February 2017 Opaque conditions. Market conditions Economics of collection. The remain volatile and opaque. Sims noted a sequential improvement in ferrous scrap volumes of 10% in 2QFY17, but this followed a 11% sequential decline in 1QFY17. Volatility in steel and raw material prices continue to be the order of the day. More invested in price. Cash from operating activities declined $25m YoY, principally due to working capital movements. While physical inventory was down 35%, recovering prices drove a $23m working capital release in 1HFY17 ($103m in pcp) Brexit weighs on UK. Sims joins a number of companies pointing to the uncertainties Brexit brings to its UK operations. economics of secondary metal collection remains challenged by low commodity prices. Sims depend directly on peddlers for ~10% of its volume, while ~45% of material is supplied via dealers, which in turn depend heavily on peddlers to collect obsolete material. These suppliers activity levels are influenced by prices, as are the underlying source markets for scrap (like demolition and vehicles). In the US, Sims point to secondary metal generation being supported by stronger construction markets and new vehicle sales, but collection remains pressured, especially in regions with low population bases and higher transport costs. Sims estimate that, on a global basis, a $50/t scrap price movement leads to ~8% volume growth. Key Charts: Sims has been aggressively paring back its cost base in light of market conditions. This has improved operational gearing, with management estimating that an extra 500kt in volume could add $40-50m in EBIT. Break-even throughput is now 7mtpa, versus annualised sales volumes of 8.7mt in 1HFY17. It has also identified self-help initiatives which could add $70-95m to EBIT on a fullyear run-rate basis. These projects are to be implemented between 2HFY17 and FY18. Fig 2 Internal initiatives aimed at driving profitability Fig 3 Geared to volume $m Internal initiatives aimed at driving profitability HFY17 2HFY17 FY18 FY18 Exit Run Rate Annualised EBIT Lower range Upper range Source: Company data, February 2017 Note: Points to full year run-rate impact of internal initiatives Source: Company data, February February

3 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 Macquarie Wealth Management Investment Thesis Remains opaque, but balanced by self-help There are many moving parts in the scrap world at present. A recent correction in prices pointed to some of the underlying risks in this market from weak emerging market demand and the constant threat of increased Chinese steel exports, notwithstanding induction furnace closures and other measures that could stifle supply (not least of which has been solid Chinese domestic demand). Fig 4 Turkey HMS scrap price $/ton Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 CFR Turkey HMS grade Fig 5 US Midwest shredded scrap price $/ton Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 US Midwest shredded scrap Source: Platts, Bloomberg, Macquarie Research, February 2017 Source: Platts, Bloomberg, Macquarie Research, February 2017 We continue to see uncertainties in the global steel industry that could easily re-exert themselves on Sims. Our house view continues to see blast furnace competitiveness improving as the year progresses, helped by declining iron ore and met coal input costs. While the recent spike in iron ore prices has improved scrap competitiveness to levels below its long-range average, we expect iron ore prices to moderate again, particularly in 2HCY17. However, importantly, we think Chinese steel exports could remain subdued, helping the scrap picture. Fig 6 Scrap to iron ore ratio, iron units basis Fig 7 US inland prices extending their premiums % Prem/Disc 3.6x 50% 3.4x 3.2x 40% 3.0x 30% 2.8x 20% 2.6x 2.4x 10% 2.2x LR average 0% 2.0x 1.8x -10% 1.6x -20% 1.4x 1.2x 1.0x Midwest shredded / E Coast shredded Source: Platts, Bloomberg, Macquarie Research, February 2017 Source: Platts, Bloomberg, Macquarie Research, February 2017 Against this opaque market backdrop, Sims has made strong progress in self-help initiatives, lowering its break-even point to 7mtpa (against annualised throughput of 8.7m in 1HFY17). The group has identified internal initiatives, which on a run-rate basis, would add $70-95m to its current EBIT base by end-fy18. Based on our FY17 estimate of $170.5m, this could theoretically add 42% to 55% to the EBIT run-rate by the end on FY18. Our FY18 estimate assumes 21% growth. 16 February

4 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 Macquarie Wealth Management Fig 8 SGM Relative to ASX Industrials Fig 9 SGM relative to Schnitzer Steel EV/EBIT NTM SGM-AU Mean + 1 Stdev Rolling 36M Mean Mean - 1 Stdev Source: Factset, Macquarie Research, February 2017 Source: Factset, Macquarie Research, February 2017 The stock has been derated to a level in line with the ASX Industrials in recent times. Relative to other scrap focussed peers, valuation is at the lower end of long term historic norms. On the strength of this, with the evidence of much improved operational leverage and more self-help to come, we are lifting our opinion to Outperform. We still think it could be a bumpy ride as market conditions could exert themselves on the scrap market. While risks remain, the internal self-help progress means we think they are more finely balanced. Fig 10 SOTP valuation Multiple Multiple EBIT EBIT EV EV FY17e FY18e FY17e FY18e FY17e FY18e North America Metals Australia and New Zealand Metals Europe metals Global E-recycling Total 2,210 2,431 Net (debt) / cash Equity value 2,407 2,736 # of shares Value per share Time-weighted average FY17 and FY Source: Macquarie Research, February February

5 Macquarie Wealth Management Fig 11 SGM result summary A$m 1H16 2H16 MQe: 1H17e 1H17 v pcp FY16 FY17e FY18e Intake Volumes 4, , , , % 8, , ,488.9 Revenue North America Metals 1, , , , % 2, , ,710.6 Australia and New Zealand Metals % Europe Metals % Global E-recycling % Unallocated Total Revenue 2, , , , % 4, , ,310.6 Underlying EBIT North America Metals (23.1) % Australia and New Zealand Metals % Europe Metals % Global E-recycling (0.3) % Unallocated 2.5 (12.7) 0.6 (6.6) % (10.2) (5.9) 1.3 Total Underlying EBIT (4.8) % Net interest (5.8) (3.9) (3.1) (5.0) -13.8% (9.7) (7.9) (6.2) Profit before tax (10.6) % Tax expense (7.2) (3.1) (19.1) (12.0) 66.7% (10.3) (34.7) (56.2) Underlying NPAT (17.8) % Sig items (post tax) (232.3) (22.2) % (254.5) Reported profit (250.1) % (216.5) Net debt / (cash) (A$m) (372.9) (242.1) (323.3) (310.6) -16.7% (242.1) (197.6) (305.7) DPS (cps) % EPS pre-sig (cps) (8.7) % Source: Company data, Macquarie Research, February February

6 Macquarie Wealth Management Fig 12 SGM estimate summary Profit and Loss FY16 FY17e FY18e FY19e Applied Assumptions FY16 FY17e FY18e FY19e Total Revenue A$m 4, , , ,362.6 Commodity Assumptions Growth % -26.3% 14.4% -0.2% 1.0% Scrap - Asia ($/t) US$/t Scrap - Europe($/t) US$/t EBITDA A$m Scrap - US ($/t) US$/t Growth % -29.8% 53.9% 14.0% 6.4% A$/US$ $ EBITDA margin % 4.0% 5.3% 6.1% 6.4% Sales Volumes North America Metals % -17.8% 4.8% 2.8% 3.0% Depreciation & Amortisation A$m Australia and New Zealand Metals % -24.3% 13.5% 3.0% 3.0% Europe Metals % -14.3% 15.2% 3.0% 3.0% Underlying EBIT by region Aggregate Volumes '000 t 8, , , ,772.4 North America Metals A$m Growth % -18.4% 7.9% 2.8% 3.0% Australia and New Zealand Metals A$m Europe Metals A$m Ratio Analysis FY16 FY17e FY18e FY19e Global E-recycling A$m Unallocated A$m EPS (Adjusted Earnings) cps Total Underlying EBIT A$m EPS Growth % -61% 236% 15% 10% EBIT margin % 1.2% 3.2% 3.9% 4.2% P/E x 62.3x 18.5x 16.1x 14.7x EV/EBITDA x 11.7x 7.5x 6.3x 5.7x Net Interest Expense A$m EV/EBIT x 37.2x 12.5x 9.8x 8.7x GCFPS cps NPBT A$m GCFPS Growth % -54% 26% 85% -14% Income Tax Expense A$m P/CF x 18.3x 14.6x 7.9x 9.2x DPS cps NPAT (Adjusted) A$m Dividend Yield % 1.8% 3.1% 3.0% 3.4% Growth % -62.6% 236.8% 13.0% 9.7% Net Debt / (Cash) A$m (242) (198) (306) (363) Gearing (ND/[ND+E]) % -15% -12% -19% -22% Significant Items A$m Return on Equity % 1.9% 6.9% 7.5% 8.0% Interest Coverage (EBIT/Net Int) x 6.0x 21.6x 33.5x 39.9x NPAT (Reported) A$m Return on Cap (NOPAT/Eq+ND) % 2.6% 7.1% 8.8% 9.5% Cashflow FY16 FY17e FY18e FY19e Valuation - EV/EBIT A$m EBITDA A$m Multiple Multiple EBIT EBIT EV EV Change In Working Capital A$m (18.0) (48.4) 36.0 (22.7) FY17e FY18e FY17e FY18e FY17e FY18e Net Interest Paid A$m North America Metals Tax Paid A$m Australia and New Zealand Metals Other A$m (43.5) (135.6) 72.0 (45.3) Europe metals Total Operating Cashflow A$m Global E-recycling Capex A$m (108.9) (142.9) (120.0) (120.0) Investments Movement A$m Total 2,210 2,431 Investing Casfhlow A$m (95.8) (87.3) (120.0) (120.0) Proceeds from Equity Issues A$m 0.2 (44.9) - - Net (debt) / cash Borrowings Movement A$m (0.5) Equity value 2,407 2,736 Dividends Paid A$m (46.8) (63.2) (69.2) (76.9) # of shares Other A$m (64.4) (11.9) - - Value per share Financing Cashflow A$m (111.5) (117.3) (69.2) (76.9) Time-weighted average FY17 and FY Exchange Rate Adjustments A$m Net Cash Movement A$m (67.7) (43.7) A$m A$m % 400 0% Balance sheet FY16 FY17e FY18e FY19e Cash A$m PPE A$m , , ,063.0 Total Assets A$m 2, , , ,862.0 Borrowings A$m Total Liabilities A$m Total Shareholders Equity A$m 1, , , ,034.9 Source: Company data, Macquarie Research, February FY16 FY17e FY18e Total Underlying EBIT EBIT margin 4.0% 3.0% 2.0% 1.0% 0.0% FY16 FY17e FY18e -5% -10% -15% -20% Cash Borrowings Gearing (ND/[ND+E]) 16 February

7 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably positive view on Sims Metal Management. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Profitability, indicating this stock is not efficiently converting investments to earnings; proxied by ratios like ROE or ROA 311/1550 Global rank in Materials % of BUY recommendations 25% (3/12) Number of Price Target downgrades 2 Number of Price Target upgrades 8 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. BlueScope Steel 2.3 BlueScope Steel CSR 1.6 CSR Adelaide Brighton DuluxGroup Brickworks Adelaide Brighton DuluxGroup Brickworks % -80% -60% -40% -20% 0% 20% 40% 60% 80% % Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. BlueScope Steel CSR Adelaide Brighton BlueScope Steel CSR Adelaide Brighton DuluxGroup -1.1 DuluxGroup Brickworks 1.0 Brickworks % -50% 0% 50% % Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Sales FY0 Price to Book NTM Price to Book FY1 Sales to EV FY0 Net Income Margin NTM Return on Assets FY1 Operating Margin NTM Earnings Stability -27% -32% Negatives Positives -24% -25% 32% 30% 30% 30% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1550) Percentile relative to market(/422) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 16 February

8 Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) SGM AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology SGM AU: A$13.60 based on a EV/EBIT methodology Company-specific disclosures: SGM AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 19-Jan-2017 SGM AU Underperform A$ Nov-2016 SGM AU Underperform A$ Aug-2016 SGM AU Underperform A$ Jul-2016 SGM AU Underperform A$ Jun-2016 SGM AU Neutral A$ May-2016 SGM AU Neutral A$ Apr-2016 SGM AU Neutral A$ Feb-2016 SGM AU Neutral A$ Dec-2015 SGM AU Outperform A$ Nov-2015 SGM AU Outperform A$ Sep-2015 SGM AU Outperform A$ Aug-2015 SGM AU Outperform A$ Apr-2015 SGM AU Outperform A$ Mar-2015 SGM AU Outperform A$ Feb-2015 SGM AU Outperform A$ Aug-2014 SGM AU Outperform A$ Jul-2014 SGM AU Outperform A$ Jun-2014 SGM AU Neutral A$ February

9 This publication was disseminated on 15 February 2017 at 13:22 UTC. Macquarie Wealth Management 14-Feb-2014 SGM AU Neutral A$10.83 Target price risk disclosures: SGM AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. 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