Our opinion on the current state of SAPPI(SAP)

Sappi (SAP) is an international manufacturer specializing in paper, dissolving wood pulp (DWP), and paper pulp. The company supplies products to over 150 countries. DWP, a primary component used for clothing and packaging products, is crucial to Sappi's future profitability, although its price fluctuated sharply until demand from China surged in 2021. Civil unrest in July 2021 caused a loss of R220 million in profit, and additional challenges included Durban port backlogs and rising energy costs. In April 2022, severe flooding in Natal led to the temporary closure of three mills, a loss of 23,000 tons of production, and damage to 45,000 tons of inventory. Sappi filed a $28 million insurance claim and resumed operations shortly after.

The company has faced significant challenges recently. In its quarterly update to March 1, 2023, Sappi's HEPS dropped by 67%, citing weak global economic conditions and a decline in paper and pulp markets. By June 30, 2023, sales had fallen 18%, and HEPS was down 43%. The company's net asset value (NAV) had increased by 6% to 446 cents per share. Sappi's EBITDA for that quarter was US$106 million.

In the annual report ending on September 30, 2023, Sappi revealed a 20% decrease in sales and a 62% drop in HEPS (in USD), while the NAV increased by 5% to 438 cents per share. This decrease was attributed to global economic instability and challenges in key markets. An update to December 31, 2023, highlighted a further 23% drop in sales and a 22-cent (USD) headline loss per share, contrasting with a profit of 34 cents the previous year. Production was significantly affected by planned maintenance at major mills.

By March 31, 2024, sales were down 6%, and HEPS decreased by 58%. The company's NAV dropped 13% to 387 cents per share. Despite these figures, operating performance exceeded expectations, delivering a 10% increase in EBITDA to US$183 million.

Sappi's share price has been on an upward trend since August 2023, reaching 5325 cents after being included in the Winning Shares List (WSL) at 4729 cents on March 7, 2024. While the company remains in an upward trajectory, it's still a commodity share, which introduces some risk due to market volatility.