• Sappi to report Q4 23E results on Thursday, 9 November: EBITDA has fallen for three consecutive quarters; however, we expect Q4 23E EBITDA to increase by 27% q-o-q (-66% y-o-y) to $135mn (+41% y/y; -14% q/q) with EPS of $0.08/share. This is driven largely by improved profitability in North America, and to a lesser extent in South Africa. Meanwhile, we expect profitability in Europe to remain under pressure as demand remains weak, meaning fixed cost per ton will be higher, while variable costs remain elevated, albeit moderating somewhat. Results will be released at 8am tomorrow with a conference call at 4pm: Register for the Conference Call.
  • Q3 23A recap: EBITDA weakened further to $106mn, falling by 37% q-o-q (-71% y-o-y). This was largely explained by weakness in European volumes slumping 47% y-o-y (almost flat q-o-q), with Europe just remaining EBITDA positive. Profitability in North America too came under pressure as Graphics (-46% y-o-y) and Packaging & Specialties volumes (-37% y-o-y) continued to be adversely impacted by weak demand and continued destocking. Sappi guided for Q4 EBITDA to be “marginally above” that of Q3. Consensus implies an increase of 14% q-o-q to $121mn and EPS of $0.06/share.
  • European cost base to capture full benefits of capacity reductions in FY 25E (graphic paper capacity reduction of up to 28% in Europe): The Stockstadt mill is set to close in Q1 24E. The mill has around 550 employees and will reduce Sappi Europe’s pulp capacity by 145Kt/yr and graphic paper capacity by 220Kt/yr (UWF), equal to 8% of Sappi Europe’s capacity. Sappi has indicated this closure, with cash proceeds for the site will be cash neutral. Sappi has also flagged the potential closure of the Lanaken mill. The mill has around 644 employees with pulp capacity of 165Kt/yr and graphic paper capacity of 530Kt/yr, equal to 20% of Sappi Europe’s graphic paper capacity (before adjusting for the Stockstadt closure). For modelling purposes, we have assumed the mill is closed in Q2/Q3 24E, with most of the fixed cost savings only realised in 2025. Accordingly, we expect the European EBITDA margin to contract to 2.6% in FY 24E and to rebound to 5.6% in FY 25E.
  • Lower profitability and higher capex likely to see dividends paused: We have penciled in capex of $520mn in both FY 24E and FY 25E. Both years include capex of $170mn (FY 23E: $79m) for the Somerset conversion (from graphic paper to board). Taking this project into account, coupled with our expectation for EBITDA to soften by 14% y-o-y in FY 24E, we expect Sappi to pause dividends (Sappi resumed dividends in FY 22A, with a targeted dividend cover of 3x). Accordingly, we expect gearing to increase in FY 24E, with net debt/EBITDA to increase to at least 2.0x (covenant: 4x from March 23-December 2026).
  • Guidance to look out for: Based on our current estimates, we would expect Sappi to guide for Q1 24E EBITDA to be similar or slightly higher than Q4 23E. This factors in a planned shut at Somerset (Q1 23A: $22mn).
  • In our view, a rebound of Graphic Paper and Packaging & Specialties volumes remains the key ST catalyst: To value Sappi, we use the average target price derived from our free cash flow to firm (FCFF), and EV/EBITDA (x) valuations. On this basis, we set a one-year target price of R 44.14/share (+12%), which underpins our NEUTRAL rating.

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