Attractive on many levels
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.