The Firetrail Australian High Conviction Fund had a shocker in August, falling 3.2 per cent for the month versus the 1.4 per cent gain in its benchmark ASX 200 Accumulation Index.
August reporting season proved disappointing for the fund, with one-month returns negatively impacted by a range of small earnings downgrades across the portfolio. The top ten positions within the portfolio incurred earnings downgrades of minus 3.3 per cent on average.
One of the key detractors for the month was an overweight positions in Sims Metal Management (ASX:SGM).
Sims is the world’s largest scrap steel producer. Firetrail’s investment thesis for Sims is focused on two main areas:
1) China supply side reform – China is committed to reducing overcapacity across the steel industry. Less Chinese steel production means less Chinese steel exports. That creates opportunity for scrap metal players like Sims, as Electric Arc Furnaces demand more scrap to make steel.
2) A global market share of around 10 per cent – the market is incredibly fragmented, and Sims is fortunate to have more than 10 per cent of its market capitalisation in cash. Firetrail believe Sims is likely to have some material opportunities to consolidate and add shareholder value over the coming years.
Sims Metal shares fell close to 30 per cent in August as the market panicked about the outlook for Turkey, that country being the world’s largest scrap buyer, equating to around 15 per cent of Sims ferrous sales.
Firetrail strongly believes a Turkish economic downturn will not result in a reduction in Turkish scrap demand, saying if Turkish demand falls, Turkish steel mills will continue to produce and export to the global market.
In its most recent results, Sims said the recent doubling of tariffs by the US on Turkey’s steel and aluminium exports to the US is a manageable short-term issue.
Firetrail concluded by saying the fund retain its high conviction in Sims, taking the opportunity to increase its overweight position in the company given the recent share price decline.
The Sims Metal share price has fallen from over $17 in early August to trade at $12.75.
Sims shares trade on a price to earnings (P/E) ratio of 13.7 and a fully franked dividend yield of 4.16 per cent.