- Q4 21E results this Thursday (11 November), key numbers to look out for: Q4 to mark the fifth consecutive quarter of EBITDA improving to USD 189mn (+130% y/y and +30% q/q) and EPS of USD 0.11/share. Refer to Segmental outlook.
- Another strong quarter expected for DWP: The CCF DWP price (lagged 3m) increased by 74% y/y and by 16% q/q. Additionally, the ZAR weakened by 2% q/q. SAP guided for an incremental c.50kt in the quarter; however, we have pencilled in 43kt as global supply chain disruptions continue. FY 22E looks to be promising, as we expect the average DWP price to be 10% higher y/y. Additionally, we estimate an incremental 93kt of volumes sold in South Africa (Ngodwana oxygen issues: +23kt; Saiccor expansion delay: +40kt; Logistic issues: +10kt; Saiccor expansion ramp-up: +60kt and impact from the conversion of the calcium line: -40kt).
- North America firing on all cylinders, with momentum from Q3 continuing into Q4: US CFS producers have been fully sold out on the back of strong demand. This has seen demand in Q4 exceed 10%, with producer inventories declining during the quarter. Additionally, the pricing environment remains strong, with the CFS price up 15% y/y and 7% q/q.
- Despite guidance for European margins to remains flat q/q we believe there is downside risk due to higher energy and pulp costs: We estimate a Q4 21E EBITDA margin of -2%. FY 22E looks to be promising in the absence of surcharge pricing eroding demand further in favour of online. The spot CWF price is already up 9% since 30 September and encouragingly, the European softwood pulp marked its first decline this year of -2% this week. We estimate a FY 22E EBITDA margin of 5.1% (more than 2x), but still below the LT average of 8.1%. This is on the back of energy costs adversely impacting margins. SAP is c.50-55% integrated (function of net short pulp position), with energy costs hedged four years in advance.
- FY 22E FCF to improve significantly: With no material CapEx approved after the Saiccor expansion, this should unlock USD 150-200mn FCF next year. Coupled with EPS growth of 300% to USD 0.45/share, this should reduce net debt by 18%, with net debt/EBITDA declining further to 2.4x (FY 21E: 3.8x).
- Maintain OVERWEIGHT: SAP has rallied 36% YTD, ahead of most of its peers. 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 6.2x (10-yr average 10.2x) and 4.7x (10-yr average 5.4x), respectively. We value SAP using a SotP EV/EBITDA and set a 1-yr TP of ZAR 60.24/share.
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