Electric Arc Furnaces And Data Center Demand Will Drive Strong Long Term Prospects

Catalysts

About Sims

Sims is a global leader in metal recycling and electronics repurposing, converting scrap and data center hardware into high-value raw materials and reusable components.

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

• Acceleration in electric arc furnace build outs in the U.S., Australia and New Zealand is lifting long-term demand for high-quality ferrous scrap. This is supporting higher utilization of Sims existing shredder network and structurally stronger trading margins and earnings.
• Rapid, sustained growth in demand for copper and aluminum driven by green energy, grid investment and infrastructure projects is expanding Sims nonferrous volumes and mix. This should support group revenue growth and a rising contribution to EBIT.
• Explosive increases in data center capacity and AI related compute needs are underpinning a growing global market for memory and server repurposing. This enables SLS to scale an asset light, higher margin business that is already contributing around one fifth of underlying EBIT and has clear earnings leverage.
• Tariff protection and reshoring of steel and aluminum production in North America are deepening domestic scrap premiums and reducing price volatility. This allows Sims to optimize domestic versus export optionality and lift net margins through a sustained margin first purchasing and sales strategy.
• Ongoing industry consolidation, higher regulatory barriers and Sims unique national footprints in key regions are strengthening its position as supplier of choice. This is supporting bolt on acquisitions funded by surplus land sales and driving operating leverage in revenue, EBITDA and EPS over time.

Assumptions

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

• The bullish analysts are assuming Sims's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.0% today to 2.9% in 3 years time.
• The bullish analysts expect earnings to reach A$270.1 million (and earnings per share of A$1.41) by about December 2028, up from A$2.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$180.4 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 1444.4x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 22.3x.
• The bullish 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 8.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in global ferrous markets driven by Chinese overproduction and record exports of finished and semifinished steel products could keep scrap prices and buy volumes under pressure in ANZ and export channels. This could limit Sims ability to grow or even sustain revenue and compress trading margins for the Metal division, which would weigh on group earnings.
• Reliance on favorable U.S. tariff settings and domestic scrap premiums to support North American margins may prove fragile if policy shifts, demand softens or buyers return to more aggressive pricing. This could erode the current margin first gains and undermine the near 50 percent increase in underlying EBITDA and near 200 percent increase in underlying EBIT achieved in FY 25, which would reduce earnings resilience.
• Execution risk around the aggressive cost out, organizational delayering and offshoring of central transactional activities could lead to operational disruptions, lower service quality or safety issues. This could limit further cost savings and potentially reverse the flat cost base achieved despite inflation, thereby pressuring net margins and free cash flow.
• High working capital intensity and recent increases in receivables, inventory and net debt, together with elevated gearing outside the preferred range and dependence on deferred U.K. sale proceeds and future surplus land sales, create balance sheet and liquidity risk. This could constrain growth CapEx, bolt on acquisitions and strategic investments, ultimately slowing revenue growth and depressing future earnings.
• The rapid growth and high expectations embedded in the SLS data center and AI driven business carry cyclical and competitive risks. These include potential normalization of DRAM pricing, hyperscalers insourcing more of their own repurposing and Sims challenges in scaling robotics and systems, which could cap SLS contribution at around one fifth of underlying EBIT rather than expanding as implied, dampening group margin expansion and earnings growth.

Valuation

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

• The assumed bullish price target for Sims is A$19.56, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be A$9.2 billion, earnings will come to A$270.1 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of A$17.94, the analyst price target of A$19.56 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.