AUSTRALIA SGM AU Price (at 5:11, 17 Nov 215 GMT) Outperform A$7.19 Valuation - EV/EBIT A$ 8.49-9.6 12-month target A$ 8.9 12-month TSR % +26.6 Volatility Index Medium GICS sector Materials Market cap A$m 1,477 3-day avg turnover A$m 13.2 Number shares on issue m 25.5 Investment fundamentals Year end 3 Jun 215A 216E 217E 218E Revenue m 6,31.9 4,531.4 4,659.8 4,683.9 EBIT m 141.7 4.3 142.8 163.5 Reported profit m 19.8-119.5 12.1 127.3 Adjusted profit m 11.5 41.5 12.1 127.3 Gross cashflow m 222.3 185.7 262.7 259.8 CFPS 18.8 9.8 128.5 127.1 CFPS growth % 15.4-16.5 41.5-1.1 PGCFPS x 6.6 7.9 5.6 5.7 PGCFPS rel x.77.95.73.76 EPS adj 49.7 2.3 58.8 62.3 EPS adj growth % 47.5-59.1 189.3 6. PER adj x 14.5 35.4 12.2 11.5 PER rel x.94 2.41.93.93 Total DPS 29. 1. 29. 31. Total div yield % 4. 1.4 4. 4.3 Franking % 1 1 1 1 ROA % 5.1 1.4 5.2 5.8 ROE % 5.1 2. 5.7 5.8 EV/EBITDA x 4.4 6.3 4. 3.9 Net debt/equity % -14.9-15.2-18.7-22.1 P/BV x.7.7.7.7 SGM AU vs ASX 1, & 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, November 215 (all figures in AUD unless noted) 18 November 215 Macquarie Securities (Australia) Limited Backing the balance sheet Event Following a disappointing AGM update last week, (SGM) hosted a conference call to provide initial detail on remedial actions and announced an intended 1% on-market buy-back. Impact Volumes crack. SGM reported a 26% YoY decline in intake volumes thus far in FY16. While gross metal margins have largely been maintained, overhead absorption has been weak, leading to the 1HFY16 break-even EBIT guide. The central region of the US remains the key area of challenge and is where the bulk of the remedial actions are focused. Invest in yourself. SGM have announced a 1% on-market buy-back following the significant falls in the stock over recent days. At current prices, we estimate ~1% EPS accretion and the buy-back would account for just under half of SGM s net cash balance. Impairing. Approximately 7% of the $23m guided significant item costs associated with the restructuring relates to the impairment of assets. Having positioned a worst-case scenario, SGM aim to minimise this impact through restructuring efforts and possible disposals (potential proceeds ~$5m). Targets changed. Owing to a significant (3%+) decline in intake volume since FY13, the target EBIT of $321m has been replaced with a target to achieve ROIC of 1%+, irrespective of market conditions. Our estimates imply a ROIC of 6.6%. Management paint a picture of a stabilising market that is expected to remain at this level of activity through the remainder of the strategic planning window. We think there remains some short-term scrap price risk after a recent rally that could prove unsustainable. Better trends, complex dynamics. As initial cost actions have taken hold, SGM have witnessed recent improvements in profitability, guiding to the attainment of a $14m EBIT run-rate exiting FY16 (and enabled by a $13m benefit from new cost saving initiatives). Earnings and target price revision No change. We will assess estimates as the buy-back progresses, but this has not yet been factored into our forecasts. Price catalyst 12-month price target: A$8.9 based on an EV/EBIT methodology. Catalyst: Buy-back progression, market price trends. Action and recommendation While still disappointed by last week s downgrade, the action to announce a buy-back underscores our focus on the group s strong balance sheet. Maintain Outperform. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Fig 1 Estimate Summary Profit and loss FY13a FY14a FY15a FY16e FY17e FY18e Applied assumptions FY13a FY14a FY15a FY16e FY17e FY18e Total Revenue A$m 7193 7135 6328 4531 466 4684 Scrap - Asia ($/t) US$/t 385 377 311 21 25 215 Growth % -21.2% -.8% -11.3% -28.4% 2.8%.5% Scrap - Europe($/t) US$/t 354 345 282 18 175 185 Source: Company data, Macquarie Research, November 215 Scrap - US ($/t) US$/t 32 296 248 148 145 155 EBITDA A$m 191 242 263 184 285 296 AUD$/US$ $ 1.1.92.83.67.64.7 Growth % -24.4% 26.6% 8.3% -29.7% 54.7% 3.7% Ratio Analysis FY13a FY14a FY15a FY16e FY17e FY18e EBITDA margin % 2.7% 3.4% 4.1% 4.1% 6.1% 6.3% Share capital A$m 2796 2796 2797 2797 2797 2797 EPS (adjusted earnings) cps 8 34 5 2 59 62 Depreciation & amortisation A$m (124) (124) (121) (144) (143) (132) EPS growth % -78% 32% 48% -59% 189% 6% P/E x 21.4x 14.5x 35.4x 12.2x 11.5x EBIT by region EV/EBITDA x 8.5x 5.9x 4.4x 6.3x 3.7x 3.3x North America Metals A$m 33 12 12 (61) 19 32 EV/EBIT x 23.9x 12.x 8.2x 28.6x 7.5x 6.x Australia and New Zealand Metals A$m 47 79 59 48 55 51 GCFPS cps 145 13 146 72 123 127 Europe metals A$m (14) 17 25 1 18 25 GCFPS growth % 3% -29% 42% -5% 71% 3% Global E-recycling A$m (1) - 44 43 5 54 P/CF x 4.9x 7.x 4.9x 9.9x 5.8x 5.7x Unallocated A$m 2 11 2 1 (2) (4) DPS cps. 1. 29. 1. 29. 31. Total EBIT A$m 68 119 142 4 143 164 Dividend Yield %.% 1.4% 4.% 1.4% 4.% 4.3% EBIT margin %.9% 1.7% 2.2%.9% 3.1% 3.5% Net debt A$m 154 (42) (314) (315) (42) (488) Gearing (ND/[ND+E]) % 7% -2% -17% -18% -23% -28% Net interest expense A$m (18) (14) (1) 13 15 18 Return on equity %.8% 3.7% 5.1% 2.% 5.7% 5.8% NPBT A$m 5 14 141 53 158 182 Interest coverage (EBIT/Net Int) x 3.9x 8.3x 177.1x -3.1x -9.6x -8.9x Income tax expense A$m (33) (36) (39) (12) (37) (55) Return on Cap (NOPAT/Eq+ND) % 2.3% 4.6% 5.5% 1.6% 5.7% 6.6% NPAT A$m 17 69 12 42 12 127 Growth % -77.8% 32.3% 47.5% -59.1% 189.3% 6.% Valuation - EV/EBIT A$m Non-recurring item A$m (483) (158) 8 (161) - - FY16e FY17e FY18e FY16e FY17e FY18e NPAT attributable to shareholders A$m (466) (89) 11 (119) 12 127 North America Metals 3% of NAV 16. 1. 321 299 325 Australia and New Zealand Metals 1.5 1. 1. 5 548 513 Adjusted NPAT A$m 17 69 12 42 12 127 Europe metals 1.5 9. 9. 14 162 222 Growth % -77.8% 32.3% 47.5% -59.1% 189.3% 6.% Global E-recycling 11.5 11. 11. 495 551 59 Cashflow FY13a FY14a FY15a FY16e FY17e FY18e Total 36.2 11. 1.2 1,419 1,56 1,65 EBITDA A$m 191 242 263 184 285 296 - Growth ch. In Working Capital A$m 231 26 74 (38) (1) () Net (debt)/cash 315 42 488 Net Interest Paid A$m 17 17 8 (13) (15) (18) Equity value 1,735 1,963 2,138 Tax Paid A$m 9 19 41 12 37 55 # of shares 24 24 24 Other A$m 363 29 158 (76) (21) (1) Value per share 8.49 9.6 1.46 Total Operating Cashflow A$m 297 21 298 148 252 259 Time-weighted average FY16 and FY17 Capex A$m (149) (64) (95) (12) (12) (11) Investments movement A$m 17 38 127 - - - Investing casfhlow A$m (119) (1) 42 (12) (12) (11) Proceeds from Equity Issues A$m - 1 1 - - - Borrowings Movement A$m (157) (198) (48) - - - Dividends Paid A$m (2) - (53) (27) (45) (63) Other A$m (9) (2) () - - - Financing cashflow A$m (187) (2) (1) (27) (45) (63) Exchange rate adjustments A$m 4 1 19 - - - Net cash movement A$m (4) 1 259 1 87 86 Balance sheet FY13a FY14a FY15a FY16e FY17e FY18e Cash A$m 47 57 316 317 45 49 PPE A$m 992 93 1,32 969 961 954 Total assets A$m 2,917 2,649 2,882 2,73 2,789 2,853 Borrowings A$m 21 15 2 2 2 2 Total liabilities A$m 988 816 769 629 64 64 Total shareholders equity A$m 1,929 1,834 2,113 2,74 2,149 2,213 A$m 6 5 4 3 2 1 A$m 2 15 1 5 EV/EBIT FY13a FY14a FY15a FY16e FY17e FY18e Cash Borrowings Gearing (ND/[ND+E]) FY13a FY14a FY15a FY16e FY17e FY18e Total EBIT EBIT margin 8.91 EV 1% % -1% -2% -3% -4% 4.% 3.% 2.% 1.%.% 18 November 215 2
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a marginally negative 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 Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 698/167 Global rank in Materials % of BUY recommendations 4% (6/15) Number of Price Target downgrades 11 Number of Price Target upgrades 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..7.5.4.2. -.5-3.6-3. -2. -1.. 1. 2. 3. -1% -8% -6% -4% -2% % 2% 4% 6% 8% 1% 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..7.6.2 -.2.7 -.8.9-3. -2. -1.. 1. 2. 3. -1% -5% % 5% 1% 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 Book FY1 Price to Book NTM Price to Book LTM Sales to EV NTM Relative Turnover Turnover (USD) 2 Day Momentum 6 Month Earnings Stability -3% -32% Negatives Positives -24% -25% -4% -2% % 2% 4% 28% 34% 33% 33% 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 -.47.64.76 -.51. -.86.24.36-1.25 -.76 1.46 Percentile relative to sector(/167) Percentile relative to market(/394) 5 1 5 1 1 1 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) 18 November 215 3
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 >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% 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 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 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 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% 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 3 September 215 AU/NZ Asia RSA USA CA EUR Outperform 48.87% 59.96% 35.63% 42.13% 59.44% 42.11% (for US coverage by MCUSA, 3.54% of stocks followed are investment banking clients) Neutral 33.44% 25.% 39.8% 52.55% 37.6% 38.42% (for US coverage by MCUSA, 5.5% of stocks followed are investment banking clients) Underperform 17.68% 15.4% 25.29% 5.32% 3.5% 19.47% (for US coverage by MCUSA,.51% of stocks followed are investment banking clients) SGM AU vs ASX 1, & 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, November 215 12-month target price methodology SGM AU: A$8.9 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 www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 12-Nov-215 SGM AU Outperform A$8.9 24-Sep-215 SGM AU Outperform A$12.6 21-Aug-215 SGM AU Outperform A$13. 29-Apr-215 SGM AU Outperform A$12.8 17-Mar-215 SGM AU Outperform A$14.1 13-Feb-215 SGM AU Outperform A$13.2 22-Aug-214 SGM AU Outperform A$12.88 23-Jul-214 SGM AU Outperform A$12.23 3-Jun-214 SGM AU Neutral A$1.74 14-Feb-214 SGM AU Neutral A$1.83 9-Jan-214 SGM AU Underperform A$9.69 23-Aug-213 SGM AU Underperform A$9.98 2-Mar-213 SGM AU Underperform A$9.67 19-Dec-212 SGM AU Underperform A$8.6 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: 18 November 215 4
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 Ltd 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 58 2 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 2 574 923, AFSL No. 23754) ("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 46 8 583 542, AFSL No. 23752) ( 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 1989. Any MGL subsidiary noted in this research, apart from MBL, 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 is 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. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 18 November 215 5