Citi upgrades Sims earnings and price target

Published at Feb 16, 2017, in Features

Analysts at Citi have viewed recent commentary by Sims Metal Management (ASX: SGM) in a positive light, prompting them to suggest ‘significant upgrades’ to earnings before interest and tax (EBIT) consensus expectations for fiscal 2018.

In particular, the broker noted management’s commitment to achieving a post-tax return on capital employed of 10% by fiscal 2018. Having crunched the numbers on forecast capital employed expectations of circa $1.8 billion in fiscal 2018, Citi estimates that achieving this target would imply a pre-tax underlying EBIT result of $250 million compared with consensus expectations of $185 million.

While Citi was closer to the mark with its forward EBIT estimates ($235 million) that some brokers, it still had to make some adjustments, upgrading earnings estimates in fiscal 2018 by 5.2%. However, what could prove significant is the flow on effect if other analysts see the need to make more material upgrades to their forecasts.

Citi also noted the improved scrap metal industry outlook with analyst Simon Thackray saying, “A decline in steel exports from China coupled with improving trends seen in US scrap exports gives us confidence in the near term macro environment for SGM”.

Consequently, the broker has also upgraded EBIT estimates for fiscal 2017 by approximately 6% and it is now forecasting a core net profit of $150.2 million, representing earnings per share of 75.8 cents, which would imply a PE multiple of 16 relative to Wednesday’s closing price of $12.14.

Citi increased its 12 month price target from $13.70 to $14.10, implying upside of 16% to yesterday’s closing price.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

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