Sappi / Interwaste and the state of play

Ouch! Poor old Sappi shareholders. Over the last few months, they've seen the company share price battered by the storm on global markets, then there was the announcement that Sappi would buy some of M-Real's European assets which sounded like a good deal until they realised that it would be funded by a highly dilutionary rights issue that saw the price fall to R36 (ex-rights) on Monday.

Let's be real, when your share price has fallen from around R100 a share to R36 a share, your shareholders are going to need a really good excuse to trust you. Reading through the financial press in the last few weeks, pretty much everybody is criticising Sappi for the deal.

But I have an alternative take on it that might make the analysts shiver... but heck what do they know anyway?

My opinion is based on the mentality of The Bigger the Problem, The Bigger the Hammer...

Let's be honest Sappi have a HUGE problem in Europe with a very fragmented paper sector - if they don't sort this situation out, they're going to die a slow death. It's not a great situation to be in, but sometimes a ballsy operator needs to flex its muscles and crack some skulls. I think this is what Sappi has done with this deal - screw the short term cost issues - if they break the back of the fragmented market, then they're well placed for the next upturn in the cycle. I don't think it's the worst deal around.

Interwaste
My other play that I chatted about a while back was Interwaste - I had mentioned that the directors were buying with the share around 40c a share. The share had been hammered down from above R1 after they had missed their earnings forecast twice this year.

Waste management is a no-brainer industry in the long term. The sector can only grow as the world continues to generate more and more waste products that need to be managed.

As the only listed option - with Enviroserv having been delisted - a bit of interest in the Interwaste offering might be justified.

The SA market currently has 3 players in the sector that dominate the large contracts. Barriers to entry are high anyway so this situation is probably not going to change in the next few years.

The share has bounced a bit in the last few weeks to trade around 70c. Might be an interesting play for long term value investors.