Here's why this ASX 200 share is crashing 14% on Tuesday

This ASX 200 share is having a tough day…

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The Sims Ltd (ASX: SGM) share price is having a day to forget on Tuesday and is one of the worst performers on the ASX 200 index.

In morning trade, the scrap metal company's shares are down over 11% to $11.33.

At one stage, the Sims share price was down as much as 14% to a 52-week low of $10.97.

Why is this ASX 200 share crashing?

Investors have been hitting the sell button in a panic after the company released a dismal trading update ahead of its annual general meeting.

According to the release, the tough trading environment that the company highlighted in August has persisted throughout the first quarter of FY 2023.

The update reveals that lower scrap volumes resulting from significantly reduced economic activity, coupled with increased competition for available infeed, has tightened trading margins in both percentage and dollar per tonne terms.

In light of this, the company expects its first half underlying earnings before interest and tax (EBIT) to be in the range of $65 million to $75 million. This is a significant decline on the underlying EBIT of $361.7 million that it reported during the first half of FY 2022.

Furthermore, management has warned that there are shipments scheduled to occur close to the half-year end. In accordance with its revenue recognition policies, this has the potential to impact whether EBIT is attributed to the first half or second half.

This earnings decline comes despite the company implementing cost mitigation initiatives during the first quarter. The company notes that these have only partially offset inflationary pressures and costs are therefore expected to remain elevated in the second quarter. Further cost reduction measures are targeted for the second half.

Management commentary

Sims CEO, Alistair Field, remains confident on the company's medium term outlook. He commented:

We believe these are short-term headwinds driven by macro-economic factors which do not alter our belief in, and our focus on, the medium-term outlook for the business."

Having delivered strong earnings in the previous three financial halves, successfully transitioned from a regional to a functional organisation, added new and innovative acquisitions, and built significant growth in SA Recycling's footprint, provides a solid platform to work towards the 2025 business goals.

I have every confidence that the fundamentals for metal recycling remain positive for the medium-term, with the decarbonisation of steel making, growth of EAFs, and the energy transition expected to continue driving demand.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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