Sappi's Improvements Priced-In

Sappi Limited’s (SPP - Snapshot Report) earnings recovery has primarily been led by improving global demand, strong pulp prices, and cost reduction efforts. The industry-wide move to reduce North American and European fine coated paper capacity is taking off the excess supply from the market. As a global leader in fine coated paper, though, Sappi could shut-in additional capacity but has not laid out any specific plans yet. As a result, we expect a slower price recovery.

Moreover, in the near term, continued high raw material and energy prices and a difficult pricing environment in Europe are likely to put pressure on fine paper segment’s margins. Hence, we reiterate our Hold recommendation on the stock. We have valued Sappi using the P/E valuation metric and forward earnings. Historically, Sappi has traded between 11x and 15x forward earnings. The company is facing cost headwinds from high raw material and energy costs and a difficult pricing environment in Europe.

Nevertheless, industry capacity is decreasing along with a rise in global demand for fine coated paper. We believe industry pricing condition to improve further (apart from Europe) with the rise in operating rates. At its current price of $11.28 per ADR, the Sappi stock price reflects the improvement in industry fundamentals. We think the stock has priced in the expected earnings improvement. Our target price is $11.50 per ADR.

Read the full analyst report on SPP.

Read the full analyst report on SPP