Is a break-up on the cards for recycler Sims? Investors hope so

Metal recycling units typically sell for about five to eight times their EBITDA, which could see Sims achieve a sale price of about $1bn for the business.

The $2bn Australian listed metal recycling company Sims is shaping as a break-up prospect, with various shareholders believed to be keen for a sale of its North American unit.

It comes after its $385m divestment of its UK-based business to Unimetals Group through Macquarie Capital, and intended sale of CLP Circular Services Holdings for $56m through Macquarie Capital, drew a positive response, with shares surging about 10 per cent after it was announced to the market on Monday after close.

Shareholders liked the transaction, because the amount received equates to about 20 per cent of the Sims market value despite the unit being a loss-maker.

One view is that Sims Adams, the joint venture operator with Sims in the US, could buy the North American business, which may place a value on the operation of about $1bn and would still provide Sims with exposure.

Sims Adams is considered to be a strong operator and could drive earnings upside.

Investor patience has been running out with Sims, with the company continuing to disappoint with respect to results, and a sale now may capitalise on the strong demand for recycled metal.

The UK Metals unit had reported an underlying loss of $12.2m from an earnings-before-interest-and-tax perspective for the six-month period.

The overall interim underlying EBITDA for Sims was down 32.9 per cent to $134.2m and net profit was down 34.9 per cent to $65.8m.

A sale from the US market would largely see Sims concentrating back on the market in Australia and New Zealand.

In 2007, under the leadership of Jeremy Sutcliffe, Sims agreed to buy Metal Management, a top US metal recycler, for $US1.5bn, creating the world’s largest publicly traded recycler, annually processing and trading more than 15 million tonnes of metal, the Wall Street Journal reported at the time.

Earlier that year, Sims agreed to merge its southern Californian metal recycling assets with those of Adams Steel to create the SA Recycling joint venture company with $700m of annual revenue from recycling metals from southern California, Arizona, southern Nevada and northern Mexico.

During the latest half-year result for Sims, the company said it expected US demand for scrap to remain robust, supporting prices, and the ANZ market continued to deliver solid results.

But strong competition for scrap was likely to continue, with geopolitical tensions remaining and volatility in export demand, prices and freight costs at a time of sticky inflation.

Last year, the North America metal unit generated $179.6m in EBITDA, down 54.6 per cent on the previous corresponding year to June 30.

Metal recycling units typically sell for about five to eight times their EBITDA, which could see Sims achieve a sale price of about $1bn for the business.

Sims is due to report its full-year result on August 20.