The Finance Ghost: The market lowdown on Sappi, Vukile Property Fund, Italtile and Curro

11 Feb 2024

If you have a weak stomach, you should look away now. If you haven’t checked your Sappi shares in the past week, this is perhaps also the time to look elsewhere. When it comes to cyclical industries, paper is up there with the most terrifying of them all.

Sappi has reported a headline loss per share of 23 US cents for the quarter ended December 2023. That’s a rather violent swing from headline earnings per share of 34 US cents for the same quarter in 2022.

Supply and demand can do wild things in this sector. Selling prices weren’t the issue. A drop in volumes of 12% was the problem, leading to ebitda falling by 46%. The performance was actually worse than that, as Sappi has started including fair value movements on the plantations in ebitda for the first time and they were positive in this quarter. In other words, these non-cash adjustments flattered ebitda in this period.

The volatile nature of the sector means that Sappi constantly needs to rework the portfolio and adapt to what is going on out there. At the moment, there is major corporate activity aimed at reducing exposure to declining graphic paper markets in Europe.

The packaging industry tends to be a better way to play this game, with Mondi announcing that it is contemplating a share-for-share acquisition of DS Smith. This would create an industry leader in European paper-based sustainable packaging. By 7 March, we will know whether Mondi is going ahead with that deal. This news is hot on the heels of Mondi executing a small acquisition in Canada for a pulp mill.

It always amazes me how results and strategies can be so different depending on where a company plays in the value chain.

No pain in Spain

Vukile Property Fund has an interesting portfolio: 60% of the exposure is in Spain and 40% is in South Africa. Given the state of play around here, there are no prizes for guessing which portfolio looks juicier.

The retail properties in Spain achieved record footfall for the 12 months to December 2023. South Africa put in a respectable performance, particularly in the township centres, which are far outperforming Vukile’s urban properties. The middle class is getting slaughtered by inflation and in effect is paying double tax on everything by using private healthcare and education. Trends like these play out in retail malls.

Overall, Vukile upgraded its full-year guidance for the dividend per share. In my view, this is one of the better property funds on the local market.

Grout that gives investors gout

To make money from selling building materials, you need consumers who are confident enough to invest heavily in their properties. These consumers are thin on the ground right now. This creates an exceptionally difficult environment for a company like Italtile, which has suffered an unpleasant drop in Heps for the six months to December.

Earnings will be down between 13.1% and 17.0%, which explains why the share price has lost a quarter of its value in the past year.

Curb your enthusiasm for Curro

Curro’s share price over the past decade is a wonderful lesson in how dangerous it is to overpay for a growth story.

The market got way ahead of itself at one point, practically believing that Curro was going to solve the “missing middle” education problem in South Africa.

There are a lot of reasons for why it didn’t work out, including the “middle” emigrating. Curro has grown, obviously, just not as quickly as investors would have liked.

That problem isn’t going away any time soon, as 15% of the school footprint is performing below expectations, leading to significant impairments in the year ended December 2023. That’s more of a problem for those who previously overpaid for the stock, though, as the growth in recurring Heps of between 26.3% and 37.2% is nothing to get upset about. It just shows you how significant the growth expectations actually were. DM

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Business Maverick

No pain in Spain

Grout that gives investors gout

Curb your enthusiasm for Curro