Australian Investment Blog

ASX:SGM 24/09/2018

Why is Sims Metals (SGM) falling?

Stock

Sims Metal (SGM) $11.99 as at 24/09/2018

Event

Metal recycling company Sims is currently trading 10% lower today after it warned the market of a weaker than previously expected first quarter of FY19 . The company blamed the weak performance on their SA Recycling joint venture based in the US which has seen volumes fall on the 4^th quarter 2018. EBIT for the 1^st quarter is expected to be between $58m & $63m above 1Q18, but well below the remaining quarters of FY18. The joint venture has seen recycled metal intake volumes fall and sales of Zorba, a mixture of non-ferrous metals mostly made up of Aluminium, has weakened while the company looks to produce a higher quality product.

Source; Sims Metals FY18 Results In the FY18 result, the company guided for this quarter to be broadly in line with 4Q18, with the new update representing around a 20% downgrade for the quarter. While it is a poor update, this is a volatile business particularly on a quarterly basis – big swings are not uncommon. Sims Metal (SGM) Chart

Market Matters Take/Outlook

The scrap market has been weak for some time as China reduces its scrap metal processing capacity and discounts between scrap and new product blow out - Sims has clearly felt the brunt of it. This downgrade may be an opportunity to buy, although it would be against the trend and high risk. The stock has fallen ~10% on a 20% downgrade, however the news may not end up being as poor on an annualized basis.

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