Sappi remains undervalued despite ticking all the right boxes in 2022, but macro likely to see this persist
by Sean Ungerer | Feb 7, 2023 | Forestry and Paper
- Sappi remains undervalued despite ticking all the right boxes in 2022, but macro-outlook likely to see this persist: In FY 22A, Sappi printed a record EBITDA ($ 1.4bn), reduced net debt by $783mn (equal to -40%), with net debt/EBITDA reaching 0.9x (lowest level since the 90’s) and resumed dividends (5% yield). Despite this, the share price increased by only 8% (+11% y-t-d) and continues to trade on an undemanding 1-yr rolled EV/EBITDA of 2.9x (lowest across peers) and is trading at a 52% discount to its 5-yr forward average (Bloomberg).
- Q4 22A recap: Sappi delivered a record quarterly EBITDA print of $391mn, the 7th consecutive quarter of sequential EBITDA improvement. European Packaging & Specialties volumes surprised to the upside (+15% y/y). It was a record quarter for North America and SA performance bounced back strongly on the back of improved DP sales. Graphic Paper volumes were in the red in both Europe (-3%) and North America (-2%) and the European margin was weaker than expected.
- Sappi to report Q1 23E results on Wednesday, 8 February: In South Africa, a strike at Transnet negatively impacted DP supply chains and with congestion at the Durban port, this is likely to adversely impact sales volumes in Q1. Furthermore, sales volumes in North America will be impacted by the annual maintenance shut at Somerset Mill. After adjusting for this, coupled with a material drop in P&W shipments in Europe, we still expect Sappi to print its 3rd highest quarterly EBITDA of $338mn (+41% y/y;
-14% q/q) and EPS of $0.33/share. Register for the Conference Call.
- Sappi’s 86th AGM will be held on Wednesday, 8 February: We do not anticipate much push back in terms of proposed resolutions. We welcome Special Resolution #1 proposing the approval for Sappi to repurchase shares (not exceeding 10% of issued shares). This will require support from at least 75% of shareholders. STI target weightings remain unchanged in 2023 (EBITDA: 50%; ROCE: 20%; Safety: 10% and Individual performance: 20%). Actual targets for 2023 are not disclosed, however we would hope that the target ROCE is increased from only 7.6% in 2022 as well as target EBITDA (FY 22A target: $706mn vs. actual $1,406mn).
- Based on SAP’s normalized EBITDA, we estimate a TP of R67/share (23% upside): Based on SAP’s current announced capacity plans, we estimate a normalized EBITDA of $734mn (46% DP; 37% P&S & 17% GP). Applying SAP’s historical 1-yr forward EV/EBITDA of 4.7x, this implies a TP of R67/share (>20% upside). SAP’s CMP implies a normalised EBITDA of $645mn, 12% below CRe.
- Capital allocation and earnings quality continues to improve: Sappi continues to proactively reduce its Graphic Paper footprint in favour of Packaging & Specialties and to degear further. In September 2022, Sappi confirmed plans to sell 3 mills in Europe (38% reduction in their European GP capacity), with net cash proceeds of €212mn expected in Q2 23E. SAP also confirmed plans to convert (from CFS to SBB) its PM2 at its Somerset mil for $418mn. Sappi resumed dividends in FY 22A, with a targeted dividend cover of 3x. Despite our outlook for earnings, we expect dividends to be in the range of $0.16-0.18/share for the next 3-yrs.
- Unlike previous cycles, SAP’s balance sheet is well positioned for the next downturn: In FY 22A, the reduction in net debt equated to a potential EV uplift of R20.49/share, compared to the actual share price move of R3.58/share. In FY 23e, we expect net debt/EBITDA to reach 0.4x (covenant: 4x from March 23-December 2026).
- SAP’s valuation has dislocated from earnings and normalized earnings and remains undervalued: We set a 1-yr TP of R78/share (a simple average of NAV; DCF, EV/EBITDA and normalised EV/EBITDA), implying 48% upside. We remain OVERWEIGHT.
Download Insights (20 pages)