AI And Data Center Shifts Will Pressure Scrap Demand And Future Earnings Potential

Catalysts

About Sims

Sims is a global metal recycling and electronics repurposing business focused on supplying scrap to steel and aluminum producers and repurposing data center hardware.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion of EAF steel capacity in the U.S., Australia and New Zealand could stall or be delayed if steel spreads compress or tariffs are unwound. This could cap scrap demand growth and limit Sims' ability to expand revenue through higher ferrous volumes.
• Persistently weak and policy driven Chinese steel exports may continue to suppress global ferrous scrap pricing outside the U.S. This may force Sims to rely increasingly on low margin ferrous markets in ANZ and could pressure group trading margins and earnings.
• Strong structural demand for nonferrous metals linked to green energy and infrastructure could trigger aggressive capacity additions and new competitors in scrap collection and processing. This may erode Sims' current pricing power and compress net margins despite high revenue contribution from nonferrous.
• Explosive AI and data center growth that currently supports SLS volumes and high value memory repurposing may be undercut if hyperscalers accelerate in house reuse programs or adopt alternative architectures. This could reduce external repurposing needs and slow EBIT growth from a business that now accounts for a meaningful share of group earnings.
• Ongoing cost out and efficiency gains, including increased shredder utilization and downstream recovery, risk plateauing while labor, compliance and offshore support costs continue to rise. This may limit further margin expansion and leave EBITDA growth vulnerable if market conditions merely normalize rather than improve.

Assumptions

This narrative explores a more pessimistic perspective on Sims compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Sims's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.0% today to 2.3% in 3 years time.
• The bearish analysts expect earnings to reach A$178.1 million (and earnings per share of A$0.93) by about December 2028, up from A$2.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$266.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, down from 1384.8x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 22.4x.
• The bearish analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ongoing growth in regional EAF steelmaking capacity in the U.S., Australia and New Zealand, supported by tariffs that insulate domestic producers and sustain premiums for scrap, could structurally lift ferrous scrap demand and support higher realized prices, underpinning stronger long term revenue and earnings.
• Persistent structural demand for nonferrous metals linked to green energy and infrastructure, combined with Sims' expanding nonferrous capabilities in NAM and ANZ such as cable granulation, MRPs and fines plants, may keep nonferrous a growing and high contribution segment, supporting group revenue and protecting net margins through the cycle.
• The rapid expansion of AI and data center capacity, alongside hyperscalers' need for lower carbon and derisked supply chains, could continue to drive strong growth in SLS volumes and memory pricing, allowing the asset light SLS business to scale further and increase its already material share of group EBIT and overall earnings.
• Disciplined self help initiatives including higher shredder utilization, more unprocessed scrap intake, enhanced downstream recovery, cost out programs and selective bolt on acquisitions may keep trading margins elevated even in flat or weak volume environments, sustaining EBITDA and EBIT growth beyond what a simple macro view would imply.
• Strategic investments such as the Pinkenba logistics hub, expanded rail and barge infrastructure in North America and potential consolidation of smaller yards could improve Sims' competitive position, logistics efficiency and access to domestic and export options, supporting higher long term revenue and stable or improving net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Sims is A$12.7, which represents up to two standard deviations below the consensus price target of A$16.02. This valuation is based on what can be assumed as the expectations of Sims's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$19.56, and the most bearish reporting a price target of just A$12.7.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$7.7 billion, earnings will come to A$178.1 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of A$17.2, the analyst price target of A$12.7 is 35.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.