• Q3 22E results on Thursday 4 August, key numbers to look out for: We expect EBITDA to improve by 121% y/y to USD 320mn (-5% q/q) and EPS of USD 0.33/share. We expect Graphic Paper to surprise to the upside. DP is likely to disappoint on the back of continued logistic constraints largely impacting pulp producers.
  • Europe set for a strong Q3 22E, despite historically being one of Sappi’s seasonally weaker quarters: Pricing environment remains strong, with Q3 CWF prices up 70% y/y and 23% q/q (CM: +75% y/y & +18% q/q). Demand continues to remain robust and order books are currently strong (full for the next 4-5 months). Packaging & Specialties pricing continues to improve. There has been some weakness in consumer linked products, but not material vs. other key grades. We expect the EBITDA margin to reach 15.7% in Q3 22E. We caution around further energy surcharges as gas prices in Europe are now over EUR 200/MWH.
  • DWP performance likely to be softer in Q3 22E as logistics remains a problem: On the back of this, we expect a DP backlog again (more inventory on balance sheet; but limited impact on FCF). As before this is a timing difference and Sappi will not lose out on higher DP prices. With Arauco’s Valdivia outage, the DP market is likely to remain tight in the ST. Valdivia comprises c.7% of global DP supply but c.25% of global spot volumes (2mt). The DP cost curve has gone up by c.USD 100-120/t, with the bulk of this driven by caustic soda. This should support higher DP prices. YTD, the DP price (spot USD 1,220/t) has surprised to the upside (and potentially still could) on the back of strong demand and global logistic issues. This will benefit Q4 results.
  • North America on track for another strong quarter: Order books remain full and there are no signs of any slowdown as supported by the AF&PA US CFS stats. The pricing environment remains strong, with the CFS price up 32% y/y and 10% q/q. The BCTMP price has also increased (-19% y/y & +24% q/q). Packaging & Specialties continues to perform well with demand currently ahead of supply in the US. We expect the EBITDA margin to reach 20.8% in Q3 22E.
  • Current Sappi rating is ignoring Sappi’s de-gearing profile (maintain OVERWEIGHT: TP of R 102/share): SAP has rallied 21% YTD, ahead of its graphic paper peers (UPM: -8% & Stora Enso: -9%) and textile peers (Grasim: -2% & Lenzing: -36%). Despite this, SAP is currently trading on a 1-yr rolled forward EV/EBITDA (x) of only 3.7x (CRe). This is a 39% discount to its 5yr average of 5.0x and reflects the deepest discount in the sector. In our view, the market continues to ignore the tailwinds to benefit Sappi this year – EBITDA is set to increase by c.150% y/y in FY 22E, with net debt/EBITDA set to reach 1.0x (one of the lowest in the sector) with an absolute net reduction of USD 640mn to reach USD 1.3bn.

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