Ebullient Steel and Scrap Metal Markets Provide a Sunny Fiscal 2022 Outlook for Sims

Sims’ delivery of full-year fiscal 2021 EBIT of AUD 387 million broadly tracked our expectations as a recovery in scrap market prices and liquidity benefitted Sims’ in late fiscal 2021. Steel prices remain elevated as a result of robust demand from the automotive and construction sectors amid the global economic recovery from the coronavirus shock of 2020. With the conducive conditions expected to hold in steel and scrap metal markets into fiscal 2022, we raise our fiscal 2022 EBIT estimate by a sizable 145% to AUD 625 million. However, with appreciably lower scrap prices, and correspondingly lower operating margins anticipated longer-term, we make no change to our AUD 11.50 per share fair value estimate. We continue to forecast an unchanged EBIT margin of 2.3% at midcycle, down from a forecast cyclical high of 6.5% in fiscal 2022. Shares in the no-moat stock trade at a hefty 51% premium to our unchanged fair value estimate.