Sims Limited, a global leader in metal recycling, just held its earnings call for the first half of fiscal year 2024. While the overall results were lackluster, with compressed trading margins and disappointing performance in key segments, there was a hidden gem buried deep within the transcript that seems to have gone unnoticed by analysts. The U.K. business, long a thorn in the side of Sims, might actually be a hidden gold mine... if they're willing to let it go.

CEO Stephen Mikkelsen announced that the ongoing strategic review of the U.K. operations is nearing a potential climax. Non-binding indicative bid proposals are expected by the end of February, and the interest from potential buyers has been described as "strong." This shouldn't be a surprise. Sims’ U.K. assets, strategically located throughout the country, hold significant intrinsic value for the right buyer. But Mikkelsen’s choice of words, coupled with the company's actions over the past few years, paints a compelling picture.

Could it be that the U.K. business, consistently plagued by margin compression and fierce competition, is actually worth more on the open market than as a functional part of Sims?

The company has made it clear that all options are on the table, ranging from a complete sale to various joint ventures or partnership alternatives. This openness to diverse possibilities strongly suggests a willingness to part ways with the U.K. arm if the right offer emerges.

This potential divestiture fits perfectly with Sims' broader strategy of streamlining its operations and focusing on core metal recycling businesses that consistently deliver strong returns. Over the past two years, the company has divested non-metal divisions, such as LMS, to unlock value and focus on the core metal operations. The Baltimore Scrap acquisition, completed in 2023, exemplifies this strategy, providing access to lucrative domestic sales channels in the U.S.

The U.K. business, however, stands in stark contrast to this approach. As highlighted in the recent earnings call, the U.K. division suffers from a heavy reliance on processed scrap sourced from dealers, leaving it vulnerable to tightening buy-sell spreads. Its export-oriented sales portfolio further exposes it to the volatile and often weaker global steel market.

Here's where the hypothesis gets interesting. While Sims has remained tight-lipped about the U.K. division's net tangible asset (NTA) value, Mikkelsen stated that it was "very, very solid." This phrasing suggests the NTA is significantly higher than what the market is currently attributing to the business.

Potential Scenario: U.K. Divestiture

Let's say the NTA is around $400 million. Considering the strategic location of the assets and the potential for a buyer to unlock value by restructuring the business and focusing on higher-margin, domestically-oriented sales, a sale price of $500 million to $600 million would be entirely feasible. This would represent a substantial premium to the implied value currently reflected in the company's market capitalization.

The implications of such a sale would be profound. Sims could instantly deleverage its balance sheet, providing ample capital for further strategic acquisitions in regions with stronger growth prospects, such as North America. The divestiture would also remove a persistent drag on the company's overall profitability, potentially leading to a re-rating by the market.

Furthermore, a U.K. sale could be a catalyst for reinvigorated growth in Sims' other high-performing divisions. ANZ and SA Recycling, already showcasing resilience in a challenging market, could benefit from increased focus and capital allocation. Sims Life Cycle Services (SLS), a standout performer with a proven and profitable business model, could accelerate its expansion by deploying its innovative repurposing technology at scale.

Scrap Sourcing Comparison

This chart visualizes the scrap sourcing differences between Sims' divisions, as discussed in the earnings call. These differences significantly affect profitability in the current market.

The potential divestiture of the U.K. business might just be the shock therapy Sims needs to reassert its dominance in the global metal recycling landscape. The market seems to be focused on the immediate challenges, overlooking this potential game-changer. As the strategic review progresses, investors would be wise to pay close attention to the whispers coming from across the pond. The fate of the U.K. business could hold the key to unlocking significant value for Sims and its shareholders.

"Fun Fact: Sims Limited processes enough metal to build the Eiffel Tower every 10 days!"