Industrials

Cinderella meets the frog

Sappi, at lifetime highs on the NYSE, may have at last bid farewell to a rotten century.

Barry Sergeant
08 May 2007 00:00

Johannesburg-based Sappi's latest quarterly results appear to have justified the move in the stock's price to record highs of $18.65 a share on the New York Stock Exchange, from a low of $10.67 over the past twelve months.

Sappi, the world's biggest producer of coated fine paper and dissolving pulp, reported adjusted quarterly operating income (which attempts to show like-on-like figures) for the three months to March 31 2007 (the second quarter of Sappi's 2007 financial year) of $74m, the best since at least the first quarter of 2004.

The forestry products sector has recorded a rotten century to date, but in the divisions, coated fine paper has suffered the most. In Europe, prices for coated fine paper may at last be turning around, after six years of decline. In North America, the coated fine paper sector has been hurt by Asian imports, but these have recently been hit by a levy, and may soon be subject to a further one.

Sappi's recent fortunes have been significantly boosted, however, by sharp increases in the price of pulp, the material derived from trees and used as the essential ingredient in papermaking. Sappi is long of pulp in southern Africa and North America, but short of pulp in Europe. Sappi manufactures 46% of its product in Europe, 29% in North America, and 25% in southern Africa.

In the latest quarter, Sappi fine paper Europe posted operating profit of $13m on sales of $597m, broadly in line with the previous two quarters. The comparable figures for Sappi fine paper North America were $3m on $371m; again, broadly in line with the previous two quarters. For Sappi fine paper South Africa, the figures were $2m on $89m, with the same comment applicable.

Sappi Forest Products, however, posted an operating profit of $57m on sales of $245m, significantly better than the previous two quarters. This division, which sells dissolving pulp and pulp, benefited from strong demand, and a relatively weak South African rand. Specialist investors will be interested to know that productivity within the Kraft division improved, and that the Saiccor expansion is well underway.

At the bottom line, Sappi's operating cash flow increased significantly to $175m in the latest quarter, from $152m one quarter ago, and $117m two quarters ago. Sappi is renowned in the global paper and forest products group for its ability to generate strong cash flows in even the toughest of times.

The group's operating cash flow peaked in the year to September 30 2002, at $722m, before falling to $645m the next year, then $601m in 2004, then $569m in 2005, and then $464m in the 2006 financial year.

As to the outlook for the next quarter, while Sappi notes that global operating rates for fine paper remain high, it is also confident that conditions remain conducive for further European price increases.

US import duties are seen as possibly beneficial to Sappi's fine paper business in that country, and forest products markets generally are seen as remaining "strong". While maintaining a focus on cost reduction, Sappi anticipates that its earnings in the next quarter will be higher than those just reported.

There has been a notable change in sentiment expressed by analysts towards Sappi in the past six months or so. On March 15, analysts at Credit Suisse upgraded Sappi to "neutral" to "outperform", raised estimates for the company, and upped the stock target price from $17 to $19 a share.

There is no news on finding a new CEO for Sappi. Jonathan Leslie quit that post in March 2006, and was replaced on an interim basis by Eugene Van As, executive chairman of Sappi from 1991 and non-executive chairman from 2003, when Leslie joined as CEO. Van As joined Sappi in December 1976 and was appointed to the board in January 1977, becoming CEO a year later.