Sims Metal Management Limited Performance - Assignment Example

Running head: FIRMS PERFORMANCE Name Course Institution Instructor DATE Executive summary Given our unique global metals and electronic recycling platform; and the best assets in our industry – our people; we are optimistic about our future prospects. We have taken steps to enhance our infrastructure and trading capabilities and we are confident that our operations will demonstrate tremendous operating leverage – particularly in North America – as and when scrap flows and margins normalize and macroeconomic trends demonstrate more meaningful economic recovery and growth characteristics. We will continue to grow and expand the leadership position enjoyed by our Sims Recycling Solutions division. Our solid balance sheet ensures that we have the financial flexibility to develop and implement new technologies, pursue acquisitions and expand and invest in our global business. As always, we will continue to execute on our strategy to create substantial long-term value for our shareholders while meeting the needs of our customers and other stakeholders. Table of contents Executive summary……………………………..…………………….2 Introduction……………………………………………………………7 Purpose………………………………………………………………….7 Scope……………………………………………………………………7 Methodology……………………………………………………………7 Company description……………………………………………………9 Summary report………………………………………………………..9 Company mission, vision and strategy…………………………………..9 External environment…………………………………………………….9 Internal analysis………………………………………………………….11 SWOT analysis…………………………………………………………...12 Strength evaluation……………………………………………………....13 Capital budgeting………………………………………………………..13 Sources of investment…………………………………………………....14 Financial planning………………………………………………………..15 Potential risk……………………………………………………………..15 Conclusion and recommendation………………………………………..16 References…………………………………………………………….....17 APPENDIX……………………………………………………………..19 1. Introduction 1.1 Purpose The purpose of the report is to evaluate Sims Metal Management Limited performance and provide recommendations to support a financially justified growth strategy for the planning horizon over the next three years. 1.2 Scope The report is consisted of a summary of findings during the research and the recommendations of the proposed growth strategy, and also includes the relevant analysis leading to the recommendations under appendices. 1.3 Methodology The report applies a number of different techniques and models during the evaluation and analysing process. Those include Porter’s five forces, SWOT analysis, ratio analysis using traditional decomposition approach, capital budgeting model (included Weighted Average Cost of Capital), and dividend policy analysis. 1.4 Company Description Sims Metal Management Limited operates in the metal recycling industry. The company engages in ferrous secondary recycling, non-ferrous secondary recycling, secondary processing, and recycling solutions businesses. Its ferrous secondary recycling activities comprise the collection, processing, and trading of iron and steel secondary raw material; non-ferrous secondary recycling activities consists of the collection, processing, and trading of other metal alloys and residues, principally aluminum, lead, copper, zinc, and nickel bearing materials; and secondary processing activities include the melting, refining, and ingoting of certain non-ferrous metals; and the reclamation and reprocessing of plastics. The company also provides recycling solutions, such as the provision of environmentally responsible solutions for the disposal of post-consumer electronic products comprising information technology assets recycled for commercial customers. Its recycling solutions include negative value materials, such as refrigerators, and electrical and electronic equipment. It operates primarily in the United States, Canada, Australia, New Zealand, Papua New Guinea, India, Singapore, Hong Kong, South Africa, the United Kingdom, Sweden, Belgium, the Netherlands, Germany, Hungary, Poland, the Czech Republic, Austria, and Croatia. The company was formerly known as Sims Group Limited and changed its name to Sims Metal Management Limited in November 2008. Sims Metal Management Limited was incorporated in 2005 and is headquartered in New York, New York. 2. Summary of the report 2.1 Company’s Missions, Visions and Strategies As to suggest an appropriate strategy for the future growth of the firm, the company’s missions, vision as well as the current strategies are necessary to be understood clearly. Recall that the core mission of the firm is to provide end to end quality products that are environmental friendly, while its vision is to be the largest and best respected leading firm in manufacturing and recycling industry. Metal Management Limited current strategies are focused to obtain increased utility of quality product that are environmental friendly from existing customers, increasing its operations into and out of North Queensland, and maintaining inflation adjusted operating cost structures. 2.2 External Environment Analysis Looking at the recent performance of the major stock exchanges, such as Dow Jones Industry Average and FTSE 100 Index, we can confidently state that the global economy has been recovered from the Global Financial Crisis since 2009, although there are some concerns over the economic development and sustainability in US and Europe. In contrast, Australians are enjoying their growing economy with considerable GDP growth rates and increased retail turnover over the years. However, the growing inflation rate is sending a signal that the heating economy should be cooled down since a series of stimulus package implemented by federal government during 2008-09. Meanwhile, global fuel and oil price has constantly increased over the last three years. Because of the political turbulence in Middle East countries, a further increase in oil price is strongly expected in the market. In addition, the strengthening Australian dollars negatively affect on the export sales, when translating the offshore earning s denominated in Eurocurrency. In regard to the manufacturing and recycle Industry, is considered as the “backbone” of the Australia economy as it directly influences every part of the economy and every household’s standard of living, from what they buy, to the price they pay for goods, to how they get from place to place. In other words, the performance of the industry can affect every household as well as the local economy more or less. Referring to the outcomes of the Poter’s Five Forces Analysis over the industry, we conclude that the industry is currently in a favorable market position in Australia and its attractiveness is at a moderate level, despite the threats of new entrants are high due to low start-up cost and entry barriers. The implication is that the manufacturing and recycle Industry is still growing but also being more competitive. Moreover, during the research we observe that the rising fuel and oil price is the crucial factor threatening the company and the industry as a whole. Other threats are included the increased pressures on the reduction of greenhouse gas emission and the demand for more fuel consumption efficiency from green groups. We strongly believe that the company’s profit margin will be dropped significantly once the federal government introduces the exercise duty tax in the future. On the other hand, there are also opportunities offered in the industry, such as the federal government’s regulatory reforms and its long term strategies in road infrastructure, which underpins the growth of the industry. And the usage of road freight transport is estimated to grow sharply by 2030, according to the Australia’s Bureau of Infrastructure. In addition, the synergic benefits from mergers and acquisitions (M&A) are also considered as an opportunity in the industry. 2.3 Internal Analysis Furthermore, implementing internal analysis is equally important as it allows us to measure the performance of the firm in comparison with its major competitors, and to understand the comparative strengths as well as weaknesses over the industry. When we summarize our findings, we discover the main comparative strength is that Sims Metal Management Limited has a strong customer base both in retail and wholesale level, and the leading customers are included Simplot Australia, Cadbury, Woolworths and Coles. The company also has as extensive east coast network with its own distribution centers, allowing recycling consolidation to optimize truckload and lower transportation cost. After the takeover of CLC Produce PTY Ltd since February 2011, together with the business of Sims Metal Management Limited rural division, the company can absorb more customers who demand for road freight services to North Queensland and benefit in lower transportation costs compared to the competitors, who provide the same services to North Queensland. Additionally, the embrace of new technology and willingness to innovate that ensure the company remains at the forefront of industry advances in recycling metals. However, the company also has its weaknesses, especially in its product diversification as well as the market segmentation. Competitors such as Toll Holdings Limited and K&S Corporation Limited have provided quality products, domestically and/or internationally, while Sims Metal Management Limited only provides recycled products in Australia regions. Besides, the increasing price pressure from customers and the issues such as high inflation and fuel price are also considered as the weaknesses of the company. Overview the performance of the company by looking at its stock price over the last 5 years, it has been recovered from the Global Financial Crisis since 2009 but the price dropped again in 2010, due to the poor trading during the January to April period as the director explained. Referring to the trend analysis of the company’s financial statements in appendix (financial analysis), the drop in share price can be supported by the lower revenue growth rate and decreased NPAT in 2010. Apparently, the poor trading during the early periods of 2010 substantially affected the company’s profitability. In addition, there is a concern about the rising trend of the total debt over the last two years. Comparing the company’s financials with its major competitors, including Tolls, K&S, Chalmers and CTI, Sims Metal Management Limited has the worst performance in term of profitability and leverage. On average, the company has poorer performance in the industry, although the company’s size and product are varied with each other. Hence, the company’s stock price lacks momentum to grow in recent months. 2.4 SWOT Analysis SWOT Analysis is an important tool that we use to evaluate the company’s internal environment (Strength and Weaknesses) and external environment (Opportunities and Threats) in order to identify any available strategies for the future growth of the company. After we summarize those internal and external factors of the company (listed in Appendix C), and considering those factors with different combinations in different scenarios, the three appropriate and feasible strategies for the company are included: 1) Consolidating the market shares in North QLD; 2) Mergers & Acquisitions; and 3) Investing in equipments manufacturing and recycling efficiency, as shown on opinion analyst in Appendix. However, only one of the three will be adopted and hence, for the best of the company’s future, we have to choose the most valuable strategy, which should be the most suitable and affordable to the company. 2.5 Strategies Evaluation The first strategy of consolidating the market shares in North Queensland will not be considered, as we will not suggest any strategies which are similar to the current strategies of the firm. Although the second strategy, M&A, is attractive in term of the unexpected synergic benefit and its profitability, and is the quickest way for the company’s growth compared to other strategies. However, this strategy too will not be recommended due to the recent purchase of CLC Produce PTY Ltd in early 2011. It is not wise to acquire two companies within a year in consideration of the firm’s financial positions and the potential management changes. In addition, the size of other listed and unlisted leading competitors are relatively large in the market, which indicates that the takeover is not an easy task to achieve. Last but not least, the third strategy is about the purchase of recycling equipments, and there are two supporting reasons for the adoption. Firstly, the investment can effectively respond to the increased pressures from the stakeholders such as government and green groups, and also achieving corporate social responsibilities. Secondly, given the continued rise of global fuel price in recent years, the operating expenses of the company can be dropped through the fuel saving after the installation of efficient recycling machines. In addition, the third strategy perfectly matches the current strategies of the firm, as it can maintain the inflation adjusted operating cost structures by reducing fuel and oil expenses on the yearly basis. Hence, we recommend the board to use the third strategy of investing in fuel efficiency equipments (efficient recycling machines) for the future growth. 2.6 Capital Budgeting Decision Before we start the analysis to evaluate whether the project should be adopted, the measurement of the company’s weighted average cost of capital (WACC) is necessary as to understand its required rate of return, which is the minimum rate to satisfy the shareholders. For the calculation of WACC (Appendix NYSE: SMS ), we adopt the spreadsheets provided on the Damodaran website, given the limitations and assumptions, and the result shows that the current WACC of the firm is 8.95%., which implies the project will be accepted when its rate of return is greater or equal to 8.95%. Then we adopt the capital budgeting model to forecast the future cash flow by calculating the recycling cost saving of each year (under Appendix NYSE: SMS). Here, we assume that the total cost saving will be invested in a corporate bond with 10% coupon rate, and there is no fixed or variable expenses (e.g. maintenance cost) in the future cash flows. Eventually, we obtain a positive Net Present Value (NPV) and the Internal Rate of Return (IRR) of 46.7%, which is greater than the current WACC. In addition, the payback period of the project is 18.47 months or 1.53 years, which is the time to recover project’s initial cash outlay, according to the fuel saving calculator provided by recycle machine. The results therefore suggest that the project should be adopted. 2.7 Source of Investment Finance Note that the total budget outlay is $1.05 millions and the nature of the project has no fixed and variable expenses involved during the lifetime of the equipment. In consideration of the current financial position of the firm, we suggest that the project should be fully financed by internal resource (cash). According to the analysis in Appendix (financial analysis), there is a sign of increased gearing ration during 2010. The cost of borrowing will be more expensive as the market predicts that RBA will raise the inter-bank cash rate within the years and we advice the firm should start reducing its debt. Moreover, issuing additional shares for the affordable investment is not a wise decision due to the effect of stock dilution, while the company has adequate cash to obtain the equipments. Hence, we strongly recommend the use of internal finance rather than external finance for the investment. 2.8 Financial Planning According to OECD’s economic estimation, it forecasts the GDP growth rate of Australia to increase by 4% in 2011 and 4.5% in 2012, respectively. And also measure other economic factors such as inflation and global oil price, as well as the company’s businesses performance; we forecast the operating revenue and expenses to increase by 7% and 6% respectively, in the next three years, except the fuel and oil costs, which are estimated to raise by 3% (less than overall expenses due to the adoption of the fuel efficient equipment). As the profit is expected to grow in the future, we therefore suggest the dividend payout ratio should also increase and share the profits with the shareholders. Similar to the asset and equity, we forecast them to increase by 6% and 7%, respectively. We believe that the growing figures can directly improve the financial ratios of current year and to maintain the competitive position in the Transport and Logistics Industry. 2.9 Potential Risk of the investment Although we cannot guarantee that the equipments can produce the same effects as we estimated because the benefits of the equipment may be overvalued by the seller, however, the potential management impacts and weaknesses are nearly zero when the worst case scenario occur (in Appendix financial analysis), as the project is considered as an independent investment, whose cash flows, resources and assets are unrelated to the others, and the liquidity concern is low as well. 2.10 Conclusion and Recommendations Based on the analysis we discuss in the report, we strongly recommend the board of the company to adopt the third strategy of purchasing fuel efficient equipment (recycling machine). Although the project cannot generate millions or billions of dollars for the company like M&A, however, it can effectively reduce the greenhouse gas emission to achieve corporate social responsibility, and respond to the rising pressures from green groups. Finally, the core value of this project is priceless and meaningful to the company and the world. References: Antony, J et al, 1980, Global planning and resource management: toward international decision makingin a divided world, Pergamon Press, Minnesota. Davila T et al, 2007, The Creative Enterprise: Strategy, Greenwood Publishing Group, Redwood City. Donald W, 2005, National incident management system: principles and practice, Jones & Bartlett Learning, Chicago. Maizlish, B & Handler, R, 2005, IT portfolio management step-by-step: unlocking the business value of technology, John Wiley and Sons, Harvard. Mathis R & john h, 2007, human resource management, Cengage Learning, Atlanta. Head & Simon, (2005). The New Ruthless Economy. Oxford. University press, Oxford. Lequeux & Jean-Louis, 2008, Manager Avec les ERP, Architecture Orientée Services (SOA). Paris: editions d'organisation. Loh, T et al, 2004, Critical elements for a successful ERP implementation in SME. International Journal of Production Research. Rüdiger P, 1990, Human resource management: an international comparison, Walter de Gruyter, London. Shaul, Levi & Tauber Doron, 2010, Hierarchical examination of success factors across ERP life cycle, retrieved on 4/12/201 from http://aisel.aisnet.org/mcis2010/79/.  Waldner & Jean-Baptiste, 1992, Principles of Computer Integrated Manufacturing, John Wiley & Sons Ltd.  Chichester. Waldner, &Jean-Baptiste, 1990, Les nouvelles perspectives de la production. Dunod bordas, Paris. APPENDIX Analyst Opinion Recommendation Summary* Mean Recommendation (this week): 2.5 Mean Recommendation (last week): 2.5 Change: 0.0 * (Strong Buy) 1.0 - 5.0 (Sell) Price Target Summary Mean Target: 16.71 Median Target: 16.71 High Target: 16.71 Low Target: 16.71 No. of Brokers: 1 Data provided by Thomson/First Call Upgrades & Downgrades History Date Research Firm Action From To Oct 29, 2009 Canaccord Adams Downgrade Buy Hold May 3, 2000 Advest Inc Downgrade Buy Market Perform May 2, 2000 Gruntal & Co Downgrade NT/LT Outperformer NT/LT Mkt Performer May 2, 2000 Friedman Billings Downgrade Accumulate Market Perform May 2, 2000 Bear Stearns Downgrade Buy Neutral Apr 24, 2000 Friedman Billings Downgrade Buy Accumulate Mar 3, 2000 Gruntal & Co Upgrade NT Mkt Performer NT Outperformer Mar 3, 2000 Bear Stearns Upgrade Attractive Buy Mar 3, 2000 Friedman Billings Upgrade Accumulate Buy Jan 11, 2000 Janney Mntgmy Scott Upgrade Accumulate Buy TECHNICAL ANALYSIS Splits: none (NYSE: SMS ) After Hours: 0.00 N/A (N/A) 10:00PM EST Last Trade: 13.10 Trade Time: 4:04PM EDT Change: 0.11 (0.83%) Prev Close: 13.21 Open: 13.02 Bid: 12.40 x 400 Ask: 14.12 x 200 1y Target Est: 16.71 Day's Range: 13.00 - 13.29 52wk Range: 10.62 - 22.41 Volume: 73,650 Avg Vol (3m): 101,145 Market Cap: 2.69B P/E (ttm): 14.36 EPS (ttm): 0.91 Div & Yield: 0.72 (5.70%) People viewing SMS also viewed: Competitors analysis Direct Competitor Comparison   SMS PVT1 PVT2 PVT3 Industry Market Cap: 2.69B N/A N/A N/A 66.30M Employees: 7,500 N/A N/A N/A 77.00 Qtrly Rev Growth (yoy): 20.40% N/A N/A N/A 2.20% Revenue (ttm): 8.65B N/A N/A N/A 74.73M Gross Margin (ttm): 10.30% N/A N/A N/A 26.72% EBITDA (ttm): 355.36M N/A N/A N/A 28.20M Operating Margin (ttm): 2.63% N/A N/A N/A 4.15% Net Income (ttm): 187.75M N/A N/A N/A N/A EPS (ttm): 0.91 N/A N/A N/A 0.46 P/E (ttm): 14.36 N/A N/A N/A 11.98 PEG (5 yr expected): N/A N/A N/A N/A 0.85 P/S (ttm): 0.31 N/A N/A N/A 0.40   Pvt1 = The David J. Joseph Company (privately held) Pvt2 = OmniSource Corporation (privately held) Pvt3 = PSC, LLC(privately held) Industry= Wholesale, Other FINANCIAL Income Statement View: Annual Data | Quarterly Data All numbers in thousands Period Ending Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Total Revenue 6,299,800   6,985,800   7,375,220   Cost of Revenue 5,118,800   5,814,300   5,989,610   Gross Profit 1,181,000   1,171,500   1,385,610   Operating Expenses Research Development -   -   -   Selling General and Administrative 914,800   1,036,700   746,462   Non Recurring -   154,500   (49,467) Others 121,500   138,100   90,917   Total Operating Expenses -   -   -   Operating Income or Loss 144,600   (157,800) 597,698   Income from Continuing Operations Total Other Income/Expenses Net 21,300   27,200   29,036   Earnings Before Interest And Taxes 164,300   (98,800) 626,735   Interest Expense -   -   -   Income Before Tax 164,300   (98,800) 626,735   Income Tax Expense 57,300   22,700   210,249   Minority Interest -   -   -   Net Income From Continuing Ops 119,300   (72,400) 416,485   Non-recurring Events Discontinued Operations -   -   -   Extraordinary Items -   -   -   Effect Of Accounting Changes -   -   -   Other Items -   -   -   Net Income 107,000   (121,500) 416,485   Preferred Stock And Other Adjustments -   -   -   Net Income Applicable To Common Shares 107,000   (121,500) 416,485   Currency in USD.   Balance Sheet View: Annual Data | Quarterly Data All numbers in thousands Period Ending Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Assets Current Assets Cash And Cash Equivalents 111,700   56,200   128,348   Short Term Investments -   -   3,796   Net Receivables 486,700   361,000   819,978   Inventory 656,200   379,300   972,001   Other Current Assets 7,300   600   12,778   Total Current Assets 1,262,000   797,100   1,936,900   Long Term Investments 318,800   337,700   325,746   Property Plant and Equipment 782,000   766,200   913,627   Goodwill 972,800   927,100   1,121,622   Intangible Assets 164,900   193,100   226,551   Accumulated Amortization -   -   -   Other Assets 18,100   -   -   Deferred Long Term Asset Charges 62,600   57,900   107,073   Total Assets 3,581,100   3,079,100   4,631,519   Liabilities Current Liabilities Accounts Payable 538,400   426,700   1,053,288   Short/Current Long Term Debt 500   600   2,368   Other Current Liabilities 30,500   39,200   26,984   Total Current Liabilities 569,400   466,500   1,082,639   Long Term Debt 101,300   144,400   477,513   Other Liabilities 28,100   36,600   40,217   Deferred Long Term Liability Charges 112,900   120,300   183,102   Minority Interest -   -   -   Negative Goodwill -   -   -   Total Liabilities 811,600   767,700   1,783,471   Stockholders' Equity Misc Stocks Options Warrants -   -   -   Redeemable Preferred Stock -   -   -   Preferred Stock -   -   -   Common Stock -   -   2,236,376   Retained Earnings 359,400   275,000   649,184   Treasury Stock -   -   -   Capital Surplus -   -   -   Other Stockholder Equity 2,410,000   2,036,400   (37,512) Total Stockholder Equity 2,769,400   2,311,400   2,848,048   Net Tangible Assets 1,631,700   1,191,200   1,499,875   Currency in USD. Cash Flow Get Cash Flow for: View: Annual Data | Quarterly Data All numbers in thousands Period Ending Jun 30, 2010 Jun 30, 2009 Jun 30, 2008 Net Income 107,000   (121,500) 416,485   Operating Activities, Cash Flows Provided By or Used In Depreciation -   -   90,917   Adjustments To Net Income -   -   (71,304) Changes In Accounts Receivables -   -   (169,849) Changes In Liabilities -   -   259,191   Changes In Inventories -   -   (391,911) Changes In Other Operating Activities -   -   41,135   Total Cash Flow From Operating Activities (40,100) 448,200   174,663   Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (102,100) (151,600) (124,698) Investments 300   2,900   -   Other Cash flows from Investing Activities (108,300) (24,900) (7,691) Total Cash Flows From Investing Activities (210,000) (173,600) (132,389) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (24,800) (129,300) (150,560) Sale Purchase of Stock 373,300   300   5,514   Net Borrowings (34,800) (214,500) 195,388   Other Cash Flows from Financing Activities (7,400) -   -   Total Cash Flows From Financing Activities 303,500   (345,000) 50,342   Effect Of Exchange Rate Changes (300) 18,700   (1,344) Change In Cash and Cash Equivalents 53,400   (70,400) 91,272  Read More