Re­mark­able turn­around

Pulp and pa­per com­pany Sappi has seen im­pres­sive im­prove­ments in the past six months, and its share price is climb­ing as a re­sult.

Finweek English Edition - - MARKET PLACE - Edi­to­rial@fin­ Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

sappi, a global man­u­fac­turer of dis­solv­ing wood pulp (DWP), pa­per and spe­cial­ity pack­ag­ing prod­ucts, has seen its share price gain nearly 42% since May 2016 on the back of an im­proved fi­nan­cial per­for­mance.

The group re­ported a 91% in­crease in profit for the year to end Septem­ber, driven by lower costs and im­proved com­pet­i­tive­ness in the graphic pa­per seg­ment. Its im­proved fi­nances al­lowed it to pay a div­i­dend for the first time since 2008, with $0.11 a share de­clared at the fi­nan­cial year-end. It also made im­pres­sive progress in low­er­ing its debt bur­den – a han­gover from an ag­gres­sive in­ter­na­tional ex­pan­sion strat­egy – to about $1.4bn. In the 2015/16 fi­nan­cial year, $363m was paid off.

While the group has shown a re­mark­able turn­around, its share price re­mains some way off its 2007 high of 14 100c/share.

With the pa­per in­dus­try fac­ing a num­ber of chal­lenges – the im­pact of digi­ti­sa­tion and the in­ter­net on pa­per de­mand, ris­ing pro­duc­tion costs, stricter en­vi­ron­men­tal reg­u­la­tions, and in­creased com­pe­ti­tion from China – Sappi has been work­ing hard to re­duce its re­liance on graphic pa­per and find­ing new av­enues for growth. It is par­tic­u­larly bullish on the prospects for DWP (which can be used to pro­duce a num­ber of prod­ucts, no­tably tex­tiles) and spe­cial­ity pack­ag­ing.

Tech­ni­cal view:

In my ar­ti­cle on Sappi in the 19 Fe­bru­ary 2015 edi­tion, I rec­om­mended a long above 3 960c/share. Sappi ended a five-year con­sol­i­da­tion by trad­ing above that level a few months af­ter – it’s cur­rently test­ing prior highs above 8 000c/share. Though I re­main bullish on Sappi in the medium to long term and see it com­plet­ing a 100% re­trace­ment to its all-time high at 14 100c/share, the three-month rel­a­tive strength in­dex (RSI) has formed a lower top, sug­gest­ing that up­side mo­men­tum may be de­cel­er­at­ing. This could trig­ger a cor­rec­tion within a ma­jor bull trend, be­fore the all-time high is tested. If so, in­vestors may want to take in prof­its.

Short-term out­look:

HOLD: Sappi is cur­rently trad­ing in a steeper up­trend within its larger bull trend. It’s ap­proach­ing its sup­port trend­line (blue bold trend­line) and be­cause it has bounced there be­fore, could re­verse above that trend­line and ex­tend its gains, even more so if the RSI fol­lows suit and bounces on the lower slope of its tri­an­gle. GO SHORT: If Sappi fails to hold at 8 000c/share, it could trade out of its cur­rent up­trend. A neg­a­tive break­out, con­firmed be­low 7 155c/share, could set a short- to near-term bear­ish tone to­wards 5 780c/share. In­vestors could either re­duce or close long po­si­tions be­low 7 155c/share. The 5 780c/share level should pro­vide strong sup­port (it has held there a few times be­fore). GO LONG: If sup­port is re­tained above 8 000c/share when Sappi re­ports its fi­nan­cials on 8 Fe­bru­ary, new buy­ers should re­turn. In­crease po­si­tions above 9 950c/share as gains to­wards 12 100c/share and then 14 100c/share could en­sue.

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