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CMA Corp An Attractive Scrap Alternative

Australia | Mar 27 2008

This story features SIMS LIMITED. For more info SHARE ANALYSIS: SGM

By Chris Shaw

Any mention of scrap metal and market watchers immediately think of Sims Group ((SGM)) as the company dominates the sector but stockbroker Intersuisse sees an alternative exposure worth a buy in metals recycler CMA Corporation ((CMV)), which was created via the merger of metals trading group T&T Group and contractor Moltoni Adams.

The company has since expanded via acquisition and now has operations in Australia, New Zealand, Singapore, Malaysia and the US and has Transpacific Industries ((TPI)) as a major shareholder with a stake of 13.1%. Following its expansion the group now has integrated operations in the supply, processing and exporting of scrap metal as well as in resource sector plant deconstruction, industrial demolition, site clearance and remediation.

Intersuisse points out the group’s expansion moves over the past year or so are now showing the benefits as the first half result was a strong one, with revenues up more than 120% and net profit after tax up 159% to $7.4 million. The broker sees this trend as continuing, forecasting full year earnings this year of $20.5 million, increasing to $27 million in FY09 and well up from FY07’s $6.5 million.

Importantly for the longer-term the broker notes the company has now achieved critical mass in its areas of operation, meaning as it expands further there should be additional cost and synergy benefits that can be achieved and this will have a noticeable impact on earnings.

As well the company has been able to establish additional sources of supply and this will allow it to further build sales, including exports to existing and new markets. Systems have already been put in place to handle the expected increase in volumes so such increases should quickly be reflected in increased profits in the broker’s view.

While the company operates in a competitive sector the broker sees management as good enough and experienced enough to deliver on the potential, making the company a solid growth story. An example of the growth potential can be seen in the quantity of metal tonnage the company handles, as this increased from around 180,000 tonnes in 2H07 to around 420,000 tonnes in 1H08. The group recently opened a mercury recycling plant in Victoria and the broker expects this will add a further 140,000 tonnes a year or more to throughput.

On the broker’s earnings numbers the company is currently priced at around 9.3x earnings in FY09, while offering a forecast dividend yield of 5.5% next year. This is enough for the broker to rate the stock as a Buy, though the market capitalisation of around $250 million means there is little additional coverage to support the broker’s view. The FNArena database shows none of the ten major brokers or research houses actively cover the company.

Shares in CMA Corporation have ranged between 30.4c and 80c over the past 12 months and today the stock is slightly higher, at 1.15pm trading up 0.5c at $0.63.

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