Sims Group: Big and Getting Bigger

| About: Sims Metal (SMSMY)

Australian company Sims Group (SMS), the world’s largest publicly listed scrap metal recycler - thanks to its $1.85-billion acquisition in March this year of US metals recycler Metal Management - has announced spectacular profit growth in its 2007-08 year, ending June 2008.

Profits jumped 70% on a 38% rise in sales revenues. In part this reflected the Metal Management acquisition, but the more important reason was surging scrap metal prices. The company declared a special dividend and it is forecasting another strong year, on the back of continuing Chinese demand.

The shares reached $41.49 earlier in the year, but have fallen back sharply as scrap prices have eased. Indeed, it may seem that the price is captive to trends in the global scrap metal market, and to a large extent – up until recently - this has been the case. But changes within the company suggest some highly positive developments. This is a stock to watch.

Following the acquisition of Metal Management, Sims Group has moved its headquarters from Sydney to New York. It plans a name change in November 2008, to Sims Metal Management. It has a new CEO, American Dan Dienst from Metal Management, who replaced an Australian. In March this year it listed on the NYSE and it is promoting itself to US financial institutions.

Another incentive: Japan’s giant trading house Mitsui and Company (OTCPK:MITSY) has taken a 19% equity stake in Sims. Mitsui, which operates globally on an enormous scale, has set scrap recycling as one of the priority businesses for its medium-term growth.

But perhaps the best reason for watching this stock is the Sims Recycling Solutions division. Thanks to a series of acquisitions, along with superb organic growth, this has become the world’s largest electronics recycling business, with operations at 18 facilities in North America, Europe and Australia.

As our lives become increasingly wired, this is a business with enormous growth potential. Already Sims is handling more than 25 million items annually, from computers and TVs to refrigerators and toner cartridges. It also provides a range of very specialised services, such as data erasure and secured destruction of hard drives, the safe disposal of hazardous materials, and precious metals recovery from recycled electronic equipment.

The company’s own target is for 25% growth in this division annually. In fact, it has been far exceeding this goal, and profits [EBIT] have expanded more than eleven-fold in just the four years to June 2008, to represent 13% of total company EBIT.

Disclosure: none