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Sappi profit jumps after dissolving wood pulp prices rise

Company sees debt declining further in 2016.

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.

©2016 Bloomberg News

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