SAPPI Research Report

Is paper manufacturer SAPPI a buy at current levels?

The paper and pulp industry might not sound like the most exciting when looking for investment opportunities. But often boring companies in unglamorous industries tend to deliver solid investment returns with limited downside risk.

Sappi Limited provides materials made from wood fiber-based renewable resources in Europe, North America, and South Africa. The company offers dissolving pulp graphic papers packaging and specialty papers, including flexible packaging papers, label papers, functional paper packaging products, container boards, paperboards, silicone base papers, dye sublimation papers, and inkjet papers and casting and release papers. It also provides casting and release papers, biomaterials, and bio-energy, as well as forestry and pulp related products.

Sappi Limited was founded in 1936 and is headquartered in Johannesburg, South Africa.

SAPPI recently released results for the first quarter of there financial year in February 2023. While these were the best first quarter results they have had revenue and profits still took a large slide when compared to Q3 and Q4 of the 2022 financial year.

The company has experienced lower sales volumes and higher input costs. They were able to absorb some of these rising costs through higher prices however they still felt the brunt of rising costs in there margins.

The CEO, Steve Binnie, has warned the market that the second quarter is likely to be the company's most challenging yet and Q2 EBITDA is expected to be lower than Q1 EBITDA. The company has also divested from three European Mills in September 2022 and this deal is expected to close in the second and third quarter. Management has not yet alluded what these cash proceeds will be used for but a special dividend could be a possibility should no suitable reinvestment opportunities be identified.

The stock is currently trading a price to earnings ratio of 2.63 with a dividend yield of 5.17% and thus looks dirt cheap based on these trailing multiples especially when compared to peer companies. It was important to note however that 2022 was a significantly good year for SAPPI and thus while it looks cheap on trailing multiples forward multiples might not necessary paint the same picture given the challenges seen in Q1 and the warning from the CEO that Q2 figures are anticipated to be worse. I would thus wait for Q2 results to get clearer picture on the business before making an investment decision.