- Q4 22E results on Thursday 10 November, key numbers to look out for: We expect EBITDA to improve by 203% y/y (+18% q/q) to a quarterly record of USD 439mn (Consensus: USD 392mn) and EPS of USD 0.47/share (Consensus: USD 0.41/share).
- Europe likely to moderate q/q; however, we still expect a strong performance: Pricing environment remains strong, with Q4 CWF prices up 75% y/y and +8% q/q (CM: +75% y/y & +5% q/q). Demand continues to be strong with CWF demand outperforming other graphic paper grades in Q4. In terms of Packaging & Specialties, folding boxboard prices increased further (both y/y & q/q); however, according to CEPI data, deliveries are starting to normalize (down both y/y & q/q). We expect the EBITDA to decline q/q to EUR 178mn with a margin of 18.5%, adversely impacted by higher energy costs (ICE Dutch TTF Gas Futures averaged EUR 204/MWH, up 102% q/q – Q1 23E average to date is EUR 132/MWH, down 35% q/q).
- DP performance set to drive significant improvement in SA in Q4: Realised DP price set to be 20% higher q/q (+2% y/y) in USD (ZAR: +33% y/y & q/q). This will benefit SA the most as well as North America. We also expect SA DP volumes sold to be much stronger q/q (Q4 22E: 253kt vs. 143kt in Q3 22A). Accordingly, we expect the SA EBITDA to reach ZAR 1,976mn, with a margin of 27.9%.
- North America on track for another strong quarter: Order books remain strong and AF&PA US CFS stats point to continued growth in US CFS purchases. The pricing environment remains strong, with the CFS price up 28% y/y and +4% q/q. The BCTMP price is up 37% y/y (flat q/q). Packaging & Specialties continues to perform well with strong demand (AF&PA CY Q3 22A: US SBB production +2% y/y and operating rates over 95%), with prices up c.5% q/q. We expect EBITDA to reach USD 143mn, with a 24.1% margin.
- Balance sheet to strengthen further: We expect net debt/EBITDA to reach 0.9x in Q4 (net debt: USD 1,184mn). Our base case implies strong FCF generation in FY 23E, further bolstered by EUR 212mn proceeds from the divestment of three European mills (Maastricht; Stockstadt & Kirkniemi) in Q2 23E. We estimate net debt/EBITDA of 0.4x in FY 23E.
- What to expect from SAP’s outlook statement: SAP does not provide annual guidance; however, we expect SAP to guide for Q1 23E EBITDA to be higher y/y and lower q/q. FY 23E CapEx guidance is likely to be in the range of USD 350-450mn (CRe: USD 400mn). SAP could potentially provide an update on dividend policy (consensus implies a DPS of USD 0.06 and USD 0.15 in FY 23 and FY 24E, respectively). Our base case assumes SAP will rather focus on debt reduction and projects to reduce graphic paper exposure in favour of Packaging and Specialties. Key areas we would like colour on in FY 23E include the effective tax rate (FY 22E: 16.7%); cash taxes to be paid (FY 22E: -USD 20mn), net working capital reversal (FY 22E: USD -299mn) and net finance costs, which should be lower given the net debt reduction and the partial (EUR 209.6mn) repurchase of the 2026 bonds (3.125%).
- In terms of FY 23E, earnings will be lower, just a question of how much lower: Our base case implies an EBITDA reduction of 29% y/y to USD 991mn (consensus: USD 889mn). Although DP prices are moderating, SAP’s H1 23E realised DP price is set to be 11% higher y/y (+5% h/h) in USD and we note that if the spot USD/ZAR holds, the ZAR would be 12% weaker y/y, providing further support to earnings (spot DP: ZAR 16.8k/t).
- What does our base case imply from a valuation perspective (Maintain OVERWEIGHT: TP of ZAR 101/share): SAP is trading on a 1-yr rolled P/E of 3.7x (50% discount to its 5-yr average of 7.4) and 1-yr rolled EV/EBITDA of 3.1x, (35% discount to its 5-yr average of 4.8x. We currently estimate a 1-yr rolled levered FCF of USD 1/share, a 31% yield. If we reduce our FY 23E EBITDA by 20%, the FCF yield drops to 20%.
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