At­trac­tive on many lev­els

Finweek English Edition - - MARKET PLACE - ed­i­to­rial@fin­ By Mox­ima Gama

The fact that it re­in­stated its div­i­dend for the first time since 2008 is not the only at­trac­tive thing about Sappi at the mo­ment – it has also been out­per­form­ing its peers, with its share price gain­ing nearly 150% since the start of 2014. Sappi, a global man­u­fac­turer of dis­solv­ing wood pulp (DWP), pa­per and spe­cial­ity pack­ag­ing prod­ucts, re­cently re­ported a 91% in­crease in profit for the year to end Septem­ber, to $319m, driven by lower costs and im­proved com­pet­i­tive­ness in the graphic pa­per seg­ment. The group also ben­e­fit­ted from a weaker rand/dol­lar ex­change rate and ac­cel­er­ated growth in spe­cial­ity pack­ag­ing in Europe and North Amer­ica, which boosted vol­umes and led to im­proved mar­gins. Sappi de­clared a div­i­dend of $0.11 a share.

The group has also made more progress in pay­ing off debt, with net debt de­creas­ing by $363m year-on-year to $1.4bn at the end of Septem­ber. Sappi said it aims to de­clare on­go­ing annual div­i­dends, and over time achieve a long-term av­er­age earn­ingsto-div­i­dend ra­tio of three to one. The 2016 div­i­dend-to-earn­ings ra­tio was five to one.

There’s nor­mally a high cor­re­la­tion be­tween the growth or drop in de­mand for graphic pa­per and GDP growth. But Sappi be­lieves that in re­cent years there has been a slight dis­con­nect with the tra­di­tional de­mand for graphic pa­per drop­ping and be­cause of that it is try­ing to trans­form its busi­ness and look for new av­enues of growth – par­tic­u­larly in dis­solv­ing pulp.

The group’s abil­ity to re­duce a $2.5bn debt down to about $1bn in just three years proves it has been suc­cess­ful in its strat­egy to sell non-core as­sets and fo­cus on prod­ucts that gen­er­ate strong cash flows. Sappi is also aiming to con­tinue pay­ing down its debt and ex­pand fur­ther in dis­solv­ing pulp and in spe­cial­ity pack­ag­ing – with less de­pen­dency on graphic pa­per. How to trade it: I’ve been bullish on Sappi since Fe­bru­ary 2015 af­ter it es­caped its long-term con­sol­i­da­tion above 3 960c/share – cur­rent up­side is the as­cend­ing phase of a huge bot­tom­ing-up pat­tern. Af­ter re­cently en­coun­ter­ing ma­jor re­sis­tance at 7 945c/ share, Sappi even­tu­ally breached that level last week. An­other good buy­ing op­por­tu­nity is pre­sented at any level above 7 700c/share with po­ten­tial gains to 10 115c/share in the near to short term. Main­tain a fair stop-loss. Oth­er­wise, a re­ver­sal below 7 150c/share could trig­ger a correction to 5 775c/share.

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