Sims Metal Management Ltd (ASX: SGM) is a well known underperformer on the ASX, having lost roughly 30% of its share value over the past ten years, dividends notwithstanding. Investors who held Sims for the long term have gone backwards in a very real sense, even further if the effect of inflation is taken into account.
This is surprising, because Sims is one of the largest scrap recyclers in the world, the only company of its type on the ASX, and earns annual revenues on the high side of $7 billion dollars – over three times the total listed value of the company.
Despite this, Sims declared underlying EBITDA of only $191.4 million in 2013, blaming high competition and adverse market conditions. It's a disappointing state of affairs for a company of its size, and thankfully new CEO, Galdino Claro, has announced an ambitious plan to turn the business around.
By streamlining, optimising, and growing the business, Mr Claro aims to deliver EBIT growth of 350% over the next five years without relying on an 'external cyclical recovery or acquisitions'. While ambitious, it is the plan I have been waiting for years to see, and I have to admit, I'm excited.
As I have written several times before, Sims is fundamentally a great business that should perform a heck of a lot better than it has been, and this five-year plan is the perfect way to start the transformation.
Part of the solution will be to play the group's unique strengths rather than getting hung up on the weakness of the scrap metal market in general. Another will be to look at productivity – a curious fact from 2013's report shows that the Australiasia region delivers more tonnes of product than Europe (1.8Mt vs 1.6Mt) from more facilities (48 vs 37) with only 57% of the employees (984 vs 1,718). The Americas are even more productive than Australiasia and Europe. While this may be an overly simple analysis, it does bear questioning.
Many investors will rightfully be sceptical, because ambitious plans are just pieces of paper until they're backed up by figures. I would suggest putting Sims on your watchlist for a year or so (or more) and see how well Mr Claro's turnaround scheme is brought to fruition.
The company is already up over 10% in the past week as hopefuls buy into the big numbers, but this is a situation where patience and prudence allow you to better evaluate the situation – as well as saving your funds from a potentially risky acquisition.
At The Motley Fool we tend to avoid companies with ambitious plans if we can't be sure that they're not just pie-in-the-sky ideas. Partly it's a natural human prejudice, – we don't like being wrong – but mostly we worry that readers will lose money following our recommendations.
That's the rationale behind our top analyst's latest report on The Motley Fool's 'story stock' of 2014. By simply entering your email address into the box below – it takes 30 seconds, max – you'll receive this report free, as well as a subscription to our free weekly newsletter Take Stock. It's full of useful investing tidbits and penetrating insights, so what are you waiting for?
