At the time of writing, you can buy a Sappi share for R28.37.
You could’ve done the same thing back in November 2020, or in October 2013 for that matter, or in August 2009, when the market was still recovering from the global financial crisis. Guess what? All the way back in April 2000, you could’ve done it too.
Investors can’t even rely on the dividend, as there are several examples in the past of Sappi halting dividends completely — and we are about to experience that again, with no dividend for FY25. The trailing dividend yield is a very poor valuation metric for Sappi, as it is for most cyclical stocks.
Sappi is the furthest thing from being a buy-and-forget stock. If that’s what you’re looking for, then move right along from the paper and packaging sector, which is a cyclical bloodbath that appeals to only the brave, the foolish or both. But if you fit at least one of those characteristics and you enjoy swing trading, then read on.
Things are clearly bad right now, but just how bad are they? In the analyst presentation for the third-quarter results, Sappi shows quarterly performance going back to Q1 2021. The latest quarter reflects the first quarterly operating loss over that period, along with the lowest adjusted earnings before interest, tax, depreciation and amortisation (ebitda). The combination of weak earnings and Sappi having just gone through an extensive period of capital expenditure means that the balance sheet is in a dangerous place, leading to the decision to prioritise debt repayments over dividends.
The old adage in the market is to buy cyclicals when absolutely nobody wants them. With the share price down 42.5% year to date and all the uncertainty around global trade, this is surely closer to the bottom than it is to the top. But that doesn’t mean that this is the bottom, as Sappi still has plenty of room to drop.
It’s tempting to blame tariffs for the current issues, but Sappi is singing a different tune. It has included notes in the analyst presentation that suggest only an immaterial impact on group profitability from tariffs. Of course, there’s no way to know for sure until the trade war has settled down.
Sappi does note that the European business exports graphic papers to the US, which sounds worrying in the context of existing oversupply issues in Europe. The mitigating factor is that Sappi has invested heavily in the Somerset Mill in the US, so opportunities as a domestic producer may offset the risks.
The Somerset Mill is precisely what caused the recent spike in capex and thus the net debt-to-ebitda ratio. That ratio is about four (if you exclude fair value adjustments to the biological assets), or 2.9 if you calculate it in the way that debt covenants require. This is more than double the levels seen at the start of the year, when it was below two excluding the fair value adjustments.
The good news is that the worst of the capex in this cycle is behind Sappi, with plans to defer all nonessential spend as it looks to repair the balance sheet. Targeted capex for 2026 and 2027 is $300m each year, which puts it well below anything we’ve seen in recent years (and certainly way less than the capex in 2025 of more than $500m).
At this point, you must be wondering why Sappi even got itself into this mess, as it all sounds like it was easily foreseeable if it was spending a fortune on the new facility. The problem is that ebitda itself is a constantly moving target, with huge variability in earnings based on factors such as global pricing for paper and significant swings in input costs (ranging from agricultural inputs such as pulp and wood through to other costs such as energy, chemicals and logistics).
On top of this, you have both structural changes in consumer demand (when last did you buy A4 paper?) and short-term fluctuations based on global trade activity. With such long lead times in supply and thus the recipe for regular imbalances in the market, we have a situation that is typical for cyclical stocks: sharp moves in profits from one quarter to the next.
With margins facing severe pressure across the board in Sappi’s businesses, the day is dark and could get darker. Trying to time Sappi perfectly is a very dangerous game to play.
Instead, learning from how traders operate, it’s probably best to wait for some positive momentum in this story, fuelled by better quarterly earnings. There’s so much room for a cyclical upswing that you don’t have to obsess over catching the first 10% of it.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.