- Q2 was much better than expected: Q2 22A marked the 7th consecutive quarter of improving EBITDA to USD 337mn (24% ahead of CRe) and EPS of USD 0.35/share (44% ahead of CRe). Consequently, net debt was also better than expected, declining by 6% (USD 124mn) q/q to USD 1,793mn, with net debt/EBITDA of 2.0x (CRe: 2.3).
- Key highlights from the results: Record EBITDA achieved for Europe and North America on the back of a strong performance in Graphic Papers and Packaging and Specialty Papers. DWP volumes sold were 4% higher than our estimate and progress was made on the 100kt DWP backlog (now 44kt). Encouragingly, the average realised DWP price discount to CCF pricing narrowed to 2% (CRe), compared to 7% (CRe) in Q1 22A.
- Bullish outlook for the rest of FY 22E: SAP has guided for Q3 22E EBITDA to be consistent with Q2 22A after adjusting for an USD 50mn impact from planned maintenance impacting the DWP segment. This implies an EBITDA run rate of at least USD 287mn (CRe: USD 297mn). We believe there is upside to this guidance on the back of a weaker ZAR; if energy costs in Europe surprise to the downside, coupled with further gains in DWP and Packaging and Speciality Papers pricing in Europe. Sappi could beat its new record quarterly EBITDA in Q4 this year (CRe: USD 399mn), supported by stronger than expected DWP prices (spot: USD 1,120/t).
- Significant upgrade to FY 22E outlook: FY 22E +39% to USD 1.29/share (EBITDA USD 1,273mn); FY 23E: unchanged at USD 0.63/share (EBITDA USD 933mn) and FY 24E: +4% to USD 0.48/share (EBITDA USD 824mn).
- Sappi now has the opportunity to improve its capital structure, which would likely provide a structural re-rating: Given the outlook for H2 22E, Sappi is set to degear further, with Sappi guiding for a significant decrease in net debt in H2. We estimate a net debt/EBITDA of 1.1x (lowest level in over 15 years) at year-end, with net debt of USD 1,349mn. Looking forwards, we are strong proponents of Sappi managing net debt/EBITDA <1.5x and not reinstating dividends until the current Graphic Paper cycle inevitably turns, with margins and cash flows to come under pressure.
- Maintain OVERWEIGHT, with TP R 102/share: SAP is currently trading on a 1-yr rolled forward EV/EBITDA (x) of 4.1x (5yr average 5.1x), with EBITDA set to increase by 140% this year.
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