• Q1 22E results on Wednesday 9 February, key numbers to look out for: Q1 to mark the sixth quarter of sequential EBITDA improvement to USD 192mn (+96% y/y and +9% q/q) and EPS of USD 0.14/share.
  • Europe set to enter sweet spot this year (pricing on the rise, demand strong and pulp costs to moderate): Pricing environment has started the year strong, with spot CWF and CM prices up 25% and 36%, respectively (compared to 2021 averages). Demand continues to remain robust (most producers are sold out), with order books currently strong and lead times higher than 2017 levels. Energy surcharges should offset higher energy costs. On this basis, we expect the EBITDA margin to more than double to 8.5% (Q1 22E: 2.2%) in FY 22E.
  • DWP segment to benefit from an improved operational performance: DWP prices (spot USD 905/t) have surprised to the upside (and potentially still could) on the back of strong demand and global logistic issues. Despite DWP prices set to decline further this year, SAP’s average realised DWP price should be at least 10% higher y/y in FY 22E. From a sales volume perspective, SA was mainly impacted by global supply chain disruptions and a few one-off events in 2021 (Ngodwana oxygen: 23kt; Saiccor expansion delay: 40kt; Logistic issues: +10kt). Despite the Saiccor expansion ramp-up (CRe: +60kt), we expect DWP sales volumes of <1.3mt, which is conservative considering that SAP is guiding for most of the 100kt backlog to be cleared this year.
  • North America on track for another strong year: However, Q1 to be adversely impacted by the extended planned shut at Somerset (-USD 22mn EBITDA impact). Despite CFS import volumes increasing and now back at 2019 levels (US net CFS importer), there is a shortage of paper as CFS capacity was reduced by c.900ktpa in the past two years. Additionally, the pricing environment remains strong, with the CFS price up 24% y/y and 8% q/q.  With BillerudKorsnäs set to acquire Verso by Q2 22E, followed by conversions from CFS to board (Escanaba PM 4 during 23-25E and Escanaba PM3 during 2026-29E), this is likely to drive more favourable CFS supply/demand dynamics than previously expected.
  • Gearing concerns are over: We expect net debt to decline by 15% y/y (USD 300mn), with net debt/EBITDA declining to 1.9x (Q1 22E: 3.2x). However, looking forward, we remain concerned around the absolute level of net debt hampering optimal capital allocation (negative economic profits likely after FY 22E).
  • Maintain OVERWEIGHT & upgrade TP by 40% to R 83.95/share: SAP rallied 39% in 2021, ahead of its graphic paper peers but less than its textile peers (Grasim: +75% & Lenzing: +47%). SAP is currently trading on a 1-yr rolled forward EV/EBITDA (x) of 4.2x (5yr average 5.3x), with EBITDA set to increase by 68% this year.

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