Our opinion on the current state of SAP

Sappi (SAP) is a global leader in the manufacturing of paper, dissolving wood pulp (DWP), and paper pulp, supplying products to over 150 countries. DWP, crucial for manufacturing clothing, packaging products, and various other applications, was identified as a future profit generator for Sappi. However, the price of DWP experienced a significant drop until 2021 when it began to rise due to increased demand from China, reflecting its direct link to consumer spending patterns. Sappi's operations are geographically diversified, with its products sold in 150 countries. The company reported a loss of R220m in profit due to civil unrest in July 2021, alongside challenges such as backlogs at Durban port and escalating energy costs.

On 13th April 2022, Sappi announced the closure of three of its mills due to excessive flooding in Natal province, leading to a claim of $28m (approximately R430m) from insurers. By 21st April 2022, the company resumed operations, reporting no material damage but a significant loss of production and inventory damage.

For the quarter ending on 1st March 2023, Sappi reported a 67% decrease in headline earnings per share (HEPS), attributing the decline to a challenging global economy and weaker paper and pulp markets, resulting in an EBITDA of US$167 million. The nine-month update to 30th June 2023 showed an 18% decrease in sales and a 43% decrease in HEPS, with a 6% increase in net asset value (NAV) per share to 446c. The company cited ongoing global economic challenges and market weaknesses as factors reducing its EBITDA to US$106 million for the quarter ended June 2023.

Yearly results to 30th September 2023 indicated a 20% decline in sales and a 62% decrease in HEPS in US dollars, with a slight 5% increase in NAV to 438c per share. Sappi pointed to disruptions caused by geopolitical instability, weak global economic growth, rising interest rates, and a struggling Chinese economy as the reasons for the negative impact on its product markets. The most recent update for the three months to 31st December 2023 showed a 23% decrease in sales and a headline loss per share of 22c (US), contrasting with a profit in the previous period. The company noted that profitability was adversely affected by lower production volumes due to planned maintenance shutdowns, partially offset by a positive plantation fair value price adjustment.

Technically, Sappi's share price experienced a significant decline after forming a "triple top" between mid-2017 and September 2018, reaching a cycle bottom in March 2020 before trending upwards. The company's stock is considered a commodity share, which introduces a certain level of risk to its investors.