On an otherwise revolting day in the markets, Sappi put its best foot forward with an excellent quarterly update for the period ended March 2022. The share price closed 3.8% higher.

On a quarterly and six-month basis, revenue is up 45% year-on-year. EBITDA is flying, up 201% on a quarterly basis and 175% on a six-month basis (both numbers year-on-year).

As you might have guessed, there is a Covid-impacted base effect here. In the six months to March 2021, Sappi recorded a net loss of $40 million. In the latest six months, Sappi achieved net profit of $311 million. Take note that Sappi reports in USD.

The balance sheet also looks better, with net debt 13% lower at $1.79 billion. This was achieved by a major positive swing in net cash generation (+$105 million vs. -$53 million in the prior year). As I keep seeing across the board, working capital increased due to inflation and the resultant increase in inventories and accounts receivable.

Headline Earnings Per Share (HEPS) for six months of $0.58 per share equates to around R9.40 at current exchange rates. The share is trading at around R62, so this is an annualised Price/Earnings multiple of around 3.3x. That may sound incredibly cheap at first blush, but you need to remember that this is a cyclical stock, so you always have to be careful with multiples.

For example, “tight global paper markets” were a major contributor to this result, giving Sappi pricing power in a time of high inflation. Volumes in the pulp segment were up 9%, so the company responded well to the opportunity in the market. The graphic paper segment recorded 12% volume growth and ran at full capacity, implementing a series of selling price increases along the way. The packaging and speciality paper segment grew volumes 13% and achieved some margin expansion, but certain contractual commitments limited the ability to restore margins to normalised levels.

Capital expenditure is expected to be $395 million for FY22.

In terms of outlook, pricing conditions largely remain favourable. Due to scheduled maintenance and damage to infrastructure in KZN that has impacted access to the Port of Durban, volumes will come under pressure in the second half of the year. Overall, the company has guided underlying EBITDA for the third quarter that is in line with the second quarter.

Sappi is up nearly 32% this year and more than 40% over the past twelve months.