Sims Metal Management Ltd shares surge higher on huge profit result

The Sims Metal Management Ltd (ASX:SGM) share price has been a big mover after releasing a bumper profit result. Should you invest?

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The Sims Metal Management Ltd (ASX: SGM) share price is on course to finish the week with a strong gain.

The shares of the metals and electronics recycler are up 6% to $15.06 following the release of its full-year results.

Key highlights include:

  • Sales revenue up 9.2% to $5,079.4 million.
  • Underlying EBITDA increased 59.8% to $294.7 million.
  • Underlying NPAT up 216.1% to $120.1 million.
  • Statutory NPAT of $203.6 million.
  • Diluted earnings per share of 59.9 cents.
  • Full-year dividend of 50 cents per share.
  • Underlying return on capital of 8%.
  • Outlook: Targeting an underlying return on capital of 10% in FY 2018.

All in all, I felt this was a very strong result from Sims Metal Management and I'm not too surprised to see its shares rally higher. Especially considering management revealed that ferrous scrap metal prices have lifted around 15% since the start of FY 2018.

According to management, this is the result of steel exports from China declining. Lower export volumes have eased competitive pressures on steelmakers outside China, which has supported higher global demand for ferrous scrap metal.

A key driver of the strong result was its North America Metals segment. That segment reported underlying EBIT of $72 million in FY 2017, compared to underlying EBIT of $2 million in FY 2016.

Elsewhere its ANZ Metals segment delivered underlying EBIT of $63 million in FY 2017, up from $40 million in FY 2016. Its Europe Metals segment saw underlying EBIT lift to $35 million from $19 million in FY 2016.

And its Global E-Recycling segment delivered underlying EBIT of $20 million, up sharply from $8 million in FY 2016. This was thanks largely to a strong performance in Europe and improved prices for copper and precious metals.

Finally, it is worth pointing out that the $84 million difference between its statutory NPAT and underlying NPAT relates primarily to the gain on sale of property, as well as the recognition of previously written-off deferred tax assets.

Should you invest?

While I think things are improving greatly for Sims, I'm not a big fan of its valuation at present. Priced at 25x underlying earnings, I think its shares are a little on the expensive side.

In light of this, I think there are better options out there for investors in the sector such as Galaxy Resources Limited (ASX: GXY) and South32 Ltd (ASX: S32).

Motley Fool contributor James Mickleboro owns shares of Galaxy Resources. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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