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