Sims Metal Management Ltd plans to grow earnings by 350%: Here's what you need to know

Will an ambitious plan pay off for this chronic underperformer?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Sims Metal Management Ltd (ASX: SGM) is a well known underperformer on the ASX, having lost roughly 30% of its share value over the past ten years, dividends notwithstanding. Investors who held Sims for the long term have gone backwards in a very real sense, even further if the effect of inflation is taken into account.

This is surprising, because Sims is one of the largest scrap recyclers in the world, the only company of its type on the ASX, and earns annual revenues on the high side of $7 billion dollars – over three times the total listed value of the company.

Despite this, Sims declared underlying EBITDA of only $191.4 million in 2013, blaming high competition and adverse market conditions. It's a disappointing state of affairs for a company of its size, and thankfully new CEO, Galdino Claro, has announced an ambitious plan to turn the business around.

By streamlining, optimising, and growing the business, Mr Claro aims to deliver EBIT growth of 350% over the next five years without relying on an 'external cyclical recovery or acquisitions'. While ambitious, it is the plan I have been waiting for years to see, and I have to admit, I'm excited.

As I have written several times before, Sims is fundamentally a great business that should perform a heck of a lot better than it has been, and this five-year plan is the perfect way to start the transformation.

Part of the solution will be to play the group's unique strengths rather than getting hung up on the weakness of the scrap metal market in general. Another will be to look at productivity – a curious fact from 2013's report shows that the Australiasia region delivers more tonnes of product than Europe (1.8Mt vs 1.6Mt) from more facilities (48 vs 37) with only 57% of the employees (984 vs 1,718). The Americas are even more productive than Australiasia and Europe. While this may be an overly simple analysis, it does bear questioning.

Many investors will rightfully be sceptical, because ambitious plans are just pieces of paper until they're backed up by figures. I would suggest putting Sims on your watchlist for a year or so (or more) and see how well Mr Claro's turnaround scheme is brought to fruition.

The company is already up over 10% in the past week as hopefuls buy into the big numbers, but this is a situation where patience and prudence allow you to better evaluate the situation – as well as saving your funds from a potentially risky acquisition.

At The Motley Fool we tend to avoid companies with ambitious plans if we can't be sure that they're not just pie-in-the-sky ideas. Partly it's a natural human prejudice, – we don't like being wrong – but mostly we worry that readers will lose money following our recommendations.

That's the rationale behind our top analyst's latest report on The Motley Fool's 'story stock' of 2014. By simply entering your email address into the box below – it takes 30 seconds, max – you'll receive this report free, as well as a subscription to our free weekly newsletter Take Stock. It's full of useful investing tidbits and penetrating insights, so what are you waiting for?

Motley Fool contributor Sean O'Neil owns shares in Sims Metal.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »