Scraps not trash for Sims as shares soar 6pc as Toyota pursues rival

Shares in Sims rose more than 6 per cent in its last trading session. Picture: iStock

After being out of favour for years, metal recycling company Sims may now be one of the most popular ASX stocks if an eye-watering offer for its US-based peer is anything to go by.

Shares in the $2.7bn Sims rose more than 6 per cent on Friday after Japanese suitor Toyota Tsusho offered to pay $US1.34bn ($2.12bn) including debt for Radius Recycling, considered to be one of the few listed companies directly comparable to Sims – a staggering 115 per cent premium to its closing price on March 12.

The offer for the company advised by Goldman Sachs and JPMorgan came from left field. The business has been struggling for years, making losses and previously subject to a restructuring.

But it is perceived as a future bet on the US steel manufacturing industry under US President Donald Trump.

Sims has been shunned by listed investors for years.

It’s a highly cyclical business with exposure to volatile commodity prices, but attracted value investors such as Allan Gray, which targets out-of-favour stocks.

The market has not been quick to forgive Sims for buying Metal Management in the US for $US1.5bn in 2007 at the top of the cycle, creating the world’s largest publicly traded recycler, only to be proved to be paying too much for the business.

Analysts said that the price paid for Radius Recycling implied a value including debt of 9.7 times earnings before interest, tax, depreciation and amortisation forecast for the 2026 financial year.

Sims, by comparison, is trading at between five and seven times, analysts say.

Oregon-based Radius Recycling was previously called Schnitzer Steel Industries, taking the name of its Russian immigrant founder Sam Schnitzer, who began as a one-person scrap metal recycler in 1906. It operates throughout North America and South America, recycling vehicles, rail carts, home appliances, industrial machinery and scrap.

Observers say the price demonstrates that scrap metal is a critical input for making steel in the US, and necessary for feeding arc furnaces at a time that the nation is gearing up to become more self-reliant on steel manufacturing.

Earlier, the company had suffered from a weaker steel manufacturing industry in the US and, as China’s economy cooled.

Sims is considered a better-run business.

Some call into question whether it is now a target for a buyout, and say that at the very least its share price may rerate.

Japanese companies are known to pay top dollar for companies. Industry observers say Toyota relies on scrap metal for its car manufacturing, and components that Radius Recycling sells, as part of a circular economy play.

Analysts at Citi said in a research note that scrap metal prices had moved up in the US but had lagged behind steel pricing.

“We see this as a positive read-across for Sims Metals,” they said.

Previously, Jarden analysts had urged Sims to conduct a strategic review of its assets to determine whether it could capitalise on surplus land sales.

Others think it should sell its US operations to its non-listed joint venture partner, Sims Adams, for about $1bn. With a part owner in that venture, it would still have exposure.