• Q3 20A EPS of -USD 0.10/share in line with our estimates; however, EBITDA of USD 27mn was lower than expected (CRe: USD 40mn): Both Europe and North America printed negative EBITDA, weighed down by Graphic Paper despite fixed cost savings in excess of 10%. SA and Packaging and Specialties ensured the Group remained EBITDA positive. We were overly optimistic on Europe and North American margins, and too bearish on DWP volumes in SA. 
  • Gearing was higher than expected: Net debt/EBITDA came in at 4.1x (CRe: 3.8x) as net debt ticked up to USD 1,977mn (CRe: USD 1,905mn). We attribute this mainly to a lower working capital release of USD 20m (CRe: USD 63mn) and seasonally higher net finance charges paid. SAP has an unused RCF of USD 503m.
  • Packaging and Specialties margin (14.6%) held up better than expected in a seasonally weaker quarter: Group volumes increased by 11% y/y. This was supported by delayed shuts at Tugela and Ngodwana, which saw SA flat y/y (CRe: 115kt). Europe volumes disappointed despite adjusting for the Alfeld fire (CRe: -6kt), with volumes down 4% y/y (CRe: 0%) and with pricing slightly down. North American volumes increased by 67% y/y (CRe: +64%) as SAP ramps up coated one side and paperboard. It is encouraging that SAP’s average pricing continues to improve due to product mix (seems to be bucking the trend in the US).
  • Graphic Paper margin properly in the red at -7.4% (Q3 19A: +5.5%): This was mainly driven by volumes having declined by 40% y/y. This forced SAP to take downtime of 490kt (369kt: Europe: North America: 107kt; 14kt: SA) across the group with an EBITDA impact of -USD 125mn and reducing inventories by 63kt. Europe volumes declined by 37% (in line), with pricing stable. North American CFS volumes declined by at least 43%, while pricing was down 8% y/y (CRe: -7%). SA volumes were down > 60% y/y (CRe: 18kt).
  • DWP margins at all times lows (4.8%): DWP volumes declined by 29% y/y (-21% q/q) to 203kt, ahead of our 185kt. SAP was forced to take downtime equating to 26% of capacity (Cloquet: 17kt; SA: 76kt). Encouragingly, SAP thinks DWP demand bottomed in late May. We maintain for a material SAP re-rating, DWP prices need to recover and think this may only start towards the end of Q2 21e.  
  • “Fixed cost savings”, save now, pay later: SAP was able to lower fixed costs by USD 67m y/y. Europe -13%: mainly reduced head count, temp unemployment; North America -14%: lower personnel costs from furlough and SG&A; and SA -11%: postponement of shuts in FY 21e.  
  • Looks like SAP has shaved off a further USD 16m from FY 20e CapEx: SAP spent USD 74mn in Q3 (CRe: USD 80mn) and guiding for USD 110mn in Q4 (we had USD 120mn). We attribute this to further CapEx savings related to Saiccor expansion (our FY original estimate was USD 60mn). SAP has USD 191mn of CapEx approved.
  • No formal earnings guidance provided but some insights into demand trends: SAP remains bullish on Packaging and Specialties, expecting demand for release liner (US) and digital imaging (mainly Europe) to accelerate and the qualification (mainly US but also Europe) of new products to resume. SAP expects a slow DWP recovery in Q4, with volumes to be down 25% y/y (our -35% seems too bearish). Saiccor expansion now expected to be completed in Q3 21e. SAP expects Q4 graphic paper volumes to be down 30% y/y, which ties into our Q4 outlook (Europe: -28%; North America: -32%).  

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