• Q2 21E results tomorrow, key numbers to look out for: EBITDA USD 123m (-6% y/y and +25% q/q) and EPS of USD 0/share. We expect a slight uptick in net debt to USD 2.115mn with net debt/EBITDA of 6.4x. Refer to Segmental outlook.
  • European EBITDA margin to come under pressure: Segment EBITDA to decline by 65% y/y (-35% q/q) to EUR 19mn. This is primarily driven by lower graphic paper pricing (-8% y/y and -2% q/q), lower graphic paper sales
    (-17% y/y and +3% q/q) and higher pulp prices. European pulp prices are up 30-40% YTD, the CWF/pulp spread is now at a staggering negative EUR 176/t. As seen with the recent Stora Enso closures (UWF and CM), it appears further CWF rationalisation is required, in the absence of a strong recovery in demand.
  • We expect the North American EBIT to be in the green again: Segment EBITDA margin to expand to 10.8 (+280bps y/y and 380 bps q/q), benefitting from higher DWP prices, higher CFS prices and graphic paper volumes potentially higher than pre-COVID levels.
  • Despite a stronger ZAR (+5% q/q and +2% y/y vs. the USD), SA should have a stronger quarter: This is on the back of higher USD DWP prices (+8% y/y and 6% q/q), and higher sales volumes for DWP and Packaging.
  • EBITDA uplift from DWP price recovery to materially benefit SAP from Q3 onwards: From current levels, further DWP price increases seem unlikely considering recent weakness in VSF prices. Looking forward, we expect DWP prices to moderate, with global supply increasing by c. 7-10% this year. However, applying spot DWP price (USD 1,100/t) and the USD/ZAR of 14.50, this increases our FY 22E EPS by 88% to USD 1.05/share.
  • In FY 21E, we expect net debt/EBITDA to decline to 3.0x (FY 20A: 5.7x): However, net debt to increase by 4% to USD 2.038mn. Encouragingly, we expect net debt/EBITDA to be below 2.5x in Q1 22e and expect SAP to reach its internal net debt/EBITDA target of <2x by the end of FY 22E. 
  • Maintain OVERWEIGHT and upgrade TP by 33%: Despite a 50% rally this year, we believe SAP continues to offer further double-digit upside. SAP is currently trading on a 1-yr rolled forward P/E (x) and EV/EBITDA (x) of 7.4x (historical average 9.8x) and 5.3x (historical average 5.5x), respectively. We value SAP using a SotP EV/EBITDA and set a 1-yr TP of ZAR 71.99/share, implying 50% upside.

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