Tag: Sappi

SA helps Sappi offset tough European market

By Robert Laing for Business Live

Sappi’s SA business contributed “excellent results” during its December quarter, the paper maker said on Wednesday morning in the results statement for the first quarter of its financial year.

The group’s net profit grew 29% to $81m in the three months to end-December from $63m in the matching period in 2017, boosted by healthy demand for its dissolving wood pulp from Chinese clothes makers.
It achieved this jump in profit on 6.6% revenue growth to $1.4bn from $1.3bn.
Europe contributed 51% of the group’s sales, North America 25%, and Southern Africa 24%.
Split by product categories, coated paper contributed 54% of Sappi’s sales, dissolving wood pulp 19%, speciality paper 15%, and uncoated paper and commodity paper 6% each.

Regarding its historical home market, Sappi said increased pulp and packaging sales volumes combined with higher rand selling prices across the board more than offset higher energy and wood fibre costs.

Its North American business benefited from higher dissolving wood pulp prices.

“Our dissolving wood pulp products are used worldwide mainly by converters to create viscose fibre for fashionable clothing and textiles, as well as other consumer products,” the results statement said.

Dissolving wood pulp sales prices remained stable throughout most of the quarter, and declined slightly in December
due to pressure from lower Chinese viscose staple fibre prices and a weak Chinese paper pulp market, Sappi said.
Its European business suffered from “sluggish demand for coated graphic and packaging papers along with ongoing high paper pulp input costs”.

Around 30% of Sappi shares are held by the Public Investment Corp, the Government Employees Pension Fund and the Industrial Development Corp — and that is a fat vote of confidence in the group from government.

This is, after all, a company that has struggled to appeal to the broader market in the years since the global financial crisis began. This is probably because it took seven years to more than double from below R20 to about R40 between 2009 and 2015. Now, having shot up to around R100 more recently, it’s been deemed a great-value share.

Sappi delivered “robust” full-year results to September 2017 on “strong growth” from speciality packaging and its dissolving wood pulp business. Full-year profit of $338m rose from $319m in 2016.

The group has further reduced debt in the period, as it continues to reorientate operations away from the core business of fine-coated paper used in upmarket advertising and publishing materials.

The focus now is on high-margin dissolving wood pulp, also called chemical cellulose, used in making clothing and textiles — and on specialised packaging products.

But the turnaround has been long and slow, and only the most optimistic supporters have stuck around. The recent upward rush may also have reached a peak for now, says Electus Fund Managers analyst Mish-al Emeran, as the “low-hanging fruit” has been picked.

“[There is a] need to strike a balance between growth and the risk of oversupplied markets. We think the share price reflects the turnaround, [but] key catalysts have played out,” he says.

Chemical cellulose is the key area of growth for Sappi, Emeran says. But there could be significant additional global supply in the medium term. In the past year there was strong demand for the product, Sappi says, growing at double digits.

This is why the group’s capital expenditure in 2018 is expected to increase to $450m as it continues to convert mills in SA, Europe and North America to produce greater amounts of its chemical cellulose and speciality packaging. The latter is a sector that has enormously benefited SA pulp, packaging and paper manufacturer Mondi, as the Internet cut into Sappi’s traditional fine-coated paper markets.

Mondi has built up world-class packaging production assets in emerging European markets, while Sappi has been hampered by more expensive output costs at its mills and factories in developed European countries. Mondi only really ever made office paper, so the Internet has not been as damaging to its paper business.

But with the move to chemical cellulose and also speciality packaging, Sappi is starting to reassert itself. Both Sappi and Mondi have significant facilities in SA, Europe and the US, which supply world markets. Meanwhile, with the rand remaining weak, SA is a good place for basic product inputs, including competitive forestry resources.
For Sappi, Europe is its biggest market at 41% of sales, followed by Asia at 26%, and the US 23%. SA accounts for 10% of the total. Coated paper is still Sappi’s biggest product segment, at 56% of all sales. Speciality paper makes up 11%, commodity paper 7% and chemical cellulose 20%. But with spending during 2018 focused on higher-margin growth segments, including chemical cellulose and speciality packaging, this will position Sappi for stronger profitability from 2019 onwards, says CEO Steve Binnie.

“We have been through a period of being very conservative,” Binnie says. “We halved debt over the past four years from $2.5bn to $1.3bn.

“Our success in bringing our debt levels to below our targeted leverage ratio of less than two times net debt to [earnings before interest, tax, depreciation and amortisation] in [financial 2016] meant we could turn our attention to increased investments in growth projects.”

Markets for chemical cellulose are predicted to grow at about 5%/year.

Sappi supplies about 20% of the global market – much of this to China, India and Indonesia. The product is also widely used in cigarette filters, cellophane, pharmaceuticals and in making foodstuffs.

But Binnie says demand for textiles has been so good that Sappi has not yet had the opportunity to enter these other markets.

Emeran says management has done well to turn the business around. He says balance-sheet strength and flexibility have been restored, amid good cost control across divisions. Investors will also be pleased that Sappi’s dividend in 2017 leapt 36% to US$0.15 year-on-year.

Wade Napier, diversified resources analyst at Avior Capital Markets, says Sappi “is very comfortable” in terms of its balance sheet. He says it has never fully repaid its debt because debt is a useful means of enhancing equity returns in a low global interest-rate environment.

By Mark Allix for Business Live

Sappi’s shift in strategy is paying off

JSE-listed Sappi said its strategic shift to place more emphasis on dissolving pulp and speciality packaging was starting to pay off, placing it in a good position to reach its 2020 target.

Sappi said it had put emphasis on strong cash- generation and cost-management initiatives to reduce variable costs to reach its target.

The group said it had set aside nearly $350-million (R4.6-billion) for capital expenditure in 2017.

Sappi said it managed to improve its European and US businesses, with speciality-packaging paper units achieving strong sales growth and profit margins. In South Africa, the group said, the paper business experienced a strong recovery in sales volumes in the six months to end March.

Chief executive Steve Binnie said the business was on track to deliver projects it set to achieve locally and abroad.

“Our projects to increase capacity of speciality packaging in Europe and North America are progressing as planned,” Binnie said. “Capital expenditure in 2017 is expected to be about $350m.”

This includes the next phase of the dissolving pulp debottlenecking projects at Ngodwana and Saiccor mills, the Somerset Mill wood yard and the initial phases of the speciality-packaging conversions.”

Sappi has manufacturing operations in Europe, America and South Africa and customers in over 150 countries.

The graphic-paper markets in Europe and the US remained sluggish during the sixth-month period.

But the group said orders improved in late March and April while rising paper pulp and latex prices, along with a weaker euro, had started to place pressure on European margins. It said paper price increases, scheduled for April, offered only partial relief.

“The reason for this is that paper is a business in decline and it continues to be under pressure because of an increased shift to the digital space in conducting business and an increase in the price of raw materials, especially in the past six months,” said Binnie.

In a move to reposition the business, Binnie said Sappi would undertake some measures to keep the business going in a rapidly changing global market. He said the traditional glossy-paper business represented only one-third of the company while two-thirds consisted of dissolving wood pulp and speciality packaging.

In South Africa, Sappi has set itself growth ambitions in an economy set to grow no more than 0.8percent in 2017.

“The short-term goal is to produce 60000 tons in dissolving wood pulp over the next year in South Africa. We expect to grow that to 300000 tons in the next three years and we are hoping to increase it to a million tons by 2025,” said Binnie.

Sappi reported a marginal rise in sales to $2.6bn, up from $2.5bn, while headline earnings per share was higher at 33 US cents a share, up from 31 US cents reported in 2016. The profit came in a $178m, up from $175m a year earlier.

The group reported a net debt of $1.33bn, down by $323m year-on-year. Sappi shares rose 0.74percent on the JSE yesterday to close at R101.34.

By Sandile Mchunu for www.iol.co.za

Sappi, the world’s biggest producer of dissolving wood pulp, said first-quarter profit more than tripled after higher prices for the cotton substitute helped offset the effects of a drought in South Africa on volumes.

Net income for the three months through December increased to $75-million, compared with $24-million a year earlier, the Johannesburg-based company said in a statement on Wednesday. Revenue declined 6,8% to $1,28-billion and net debt was $1.73 billion, compared with the $1.77 billion the company reported three months ago.

Sappi is diversifying its production, as a global shift to digital publishing and advertising dampens the demand outlook for its traditional glossy paper business, and is also seeking to reduce costs and cut debt. The company expects “strong growth” in earnings in the current financial year compared with 2015 and sees net debt falling further during the year, it said in the statement.

“The successful result was attributable to higher graphic paper volumes, improved pricing for dissolving wood pulp and cost containment initiatives,” the company said. “The strategy to reposition Sappi into a profitable and cash-generative diversified woodfibre group is well on track.”

Weaker rand

Sappi’s shares closed 2.09 lower to R65.60 in Johannesburg. The stock has increased 37% in the past 12 months, compared with a 7% decline in the FTSE/JSE Africa All-Share Index.

The depreciation of the rand, which declined 10% relative to the dollar during the quarter, contributes positively to Sappi’s profit margin for dissolving wood pulp, which it exports from South African mills. Sappi’s operations in its home country, which include paper and packaging manufacturing as well as pulp, account for about half of earnings before interest, taxes, depreciation and amortisation

Low rainfall in South Africa, which dropped last year to the lowest since records began in 1904, had a negative effect of $6-million in the quarter, Sappi said. The company needs water for its manufacturing process, and low rainfall also slows tree growth.

Although dollar prices for dissolving wood pulp have come under some pressure since December because of lower textile prices and a weaker Chinese currency, demand remains strong, Sappi said.

“We remain confident that, at current pricing levels and exchange rates, the outlook for this business is positive,” the company said.

By Liezel Hill for www.moneyweb.co.za

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