• Sappi share price outperformance driven by a recovery in the global textile fibre supply chain: YTD, Sappi (+29%) has outperformed key graphic paper peers (Stora Enso: -3%; UPM: -2% and Verso: -2%).
  • Further re-rating under way: We have maintained that in order for a material re-rating to take place, the DWP price would need to rebound. This coupled with a >200kt (50% North America; 35% Europe and 15% in SA) uplift in Packaging and Specialties volumes and improving Graphic Paper dynamics drives the upgrades to our EPS outlook and accordingly our target price.   
  • FY EBITDA uplift from DWP price recovery could add up to USD 300mn EBITDA: However, Sappi will not capture the full uplift due to planned maintenance and the Saiccor expansion. Looking forward, we believe a sustained DWP price recovery is underway on the back of robust VSF supply/demand dynamics (operating rates are currently c.83% with only 9 days of days of supply).
  • Project Vulindlela at Saiccor likely to provide significant cost savings: Last cost savings guidance provided was ZAR 300/t in the FY 19A AIR. Following upgrades to the project, we estimate cost savings of at least ZAR 1,000/t. Further savings could increase our SA FY 22E EBITDA margin by 200-400bps.
  • Internal net debt target should be lowered, in our view:  In FY 21E, we expect net debt/EBITDA to decline to 3.7x (FY 20A: 5.7x), but with net debt increasing by 5% to USD 2.051mn. Encouragingly, we expect net debt/EBITDA to be below 3x in Q1 22e. Based on previous debt covenants, we would expect the revised covenant to require net debt/EBITDA to be below 4.25x. We expect SAP to reach its internal net debt/EBITDA target of <2x by FY 23E. 
  • Q1 21E results tomorrow, key numbers to look out for: EBITDA USD 78m (-44% y/y and -5% q/q) and EPS of -USD 0.04/share. We expect net debt to increase to USD 2.050mn with net debt/EBITDA of 6.5x.
  • AGM tomorrow, ordinary resolution # 5 likely to be approved: We believe the convertible bond issue is likely to be approved to ensure sufficient liquidity in the ST. With the share price currently >25% than the strike price, it is likely that debt holders will convert to equity; however, with timing uncertain.  
  • Upgrade to OVERWEIGHT: In the next 12-18months, we expect Sappi to trade above its historical average forward P/E (10x) and EV/EBITDA (5.5x). We value SAP using a SotP EV/EBITDA and set a 1-yr TP of ZAR 54.22/share, implying 26% upside.

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