Shares in Sims Ltd (ASX: SGM) were thrown on to the scrap heap after the metal recycling group posted big losses from falling prices and intense competition.
The SGM share price slumped 2.9% to $10.57 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.2%.
The underperformance is starker compared to the materials sector, which is making a comeback from earlier losses. The BHP Group Ltd (ASX: BHP) share price recovered to trade 0.7% higher at $38.75, while the Rio Tinto Limited (ASX: RIO) jumped 1.1% to $98.92 at the time of writing.
Metal fatigue
Commodity prices are helping the miners but the opposite is happening in the scrap metal market. This is one big reason why Sims reported an 18.7% tumble in interim group revenue to $2.7 billion and an 82.4% crash in earnings before interest, tax, depreciation and amortisation (EBITDA) to $30.5 million.
Even if one-off type impacts were excluded, the earnings collapse still looks bad. Underlying EBITDA was down 56.9% to $74.9 million for the six months to end December 2019.
Outlook fails to reassure
The group tried to reassure investors that the wheels aren't falling off – at least not by any more than before. Management reaffirmed its second half underlying earnings before interest and tax (EBIT) of $40 million to $60 million.
"This period has been challenging for all recycling companies globally," said Sim's chief executive Alistair Field.
"Management has responded to the challenging first half conditions with an extensive restructuring and cost reduction programme that will achieve its full run rate of A$30million in FY21.
"Our investment in sophisticated material processing facilities coincides with customers requiring higher specification products, and we are well-placed to capture an increasing share of this demand."
Losses across all geographies
The problem is that it's hard to see the light at the end of the tunnel. Just about every division posted big losses for the first half.
North America shed over $50m in underlying EBIT no thanks to a fall in ferrous prices and weak zorba pricing. The weak environment left the industry in a panic and caused irrational behaviour. Sims complained that competitors were aggressive on prices and that eroded its margins.
It's pretty much the same story for the UK, Australia and New Zealand. The underlying EBIT for all these markets went backwards. There's no safety in diversification here!
Foolish takeaway
Management was left with little choice but to slash its interim dividend by nearly 74% to just 6 cents a share.
Sims is praying that the coronavirus won't have a lasting impact on ferrous and non-ferrous demand and prices, its rivals won't be as aggressive on prices and that the Turkish economy continues to recover.
