Cash generation reins in Sappi’s bond yields

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Since announcing a return to generating cash last month, yields on Sappi's bonds have fallen 9 basis points. Photo: Simphiwe Mbokazi

Johannesburg - Sappi’s bond yields have been falling as the biggest maker of glossy paper began generating cash for the first time in a year after re-equipping plants to produce higher-margin products.

Yields on Sappi’s euro-denominated bonds due in May 2018 have fallen 9 basis points since November 7, when Sappi reported fiscal fourth-quarter results, including net cash generation of $111 million (R1.15 billion). The average yield for emerging-market pulp and paper companies has fallen 3 basis points in the period, JPMorgan Chase indices show.

Sappi’s improving cash position stemmed from using proceeds from product sales to transform two pulp mills into plants producing more-profitable chemical cellulose, used to make products ranging from sports clothing to lipstick. The company is diversifying from paper as demand drops.

“Fourth-quarter earnings already showed some evidence of the successful transition into more profitable business areas,” said Thomas Korhammer, a money manager at Raiffeisen Capital Management. “Sappi could easily refinance via the bond or loan market.”

Demand for glossy paper continued to fall in the US and European markets, resulting in lower prices and overcapacity, Sappi said on November 7.

Sappi’s European unit narrowed its operating loss excluding one-time items for the three months to September to e9m (R127m) from e13m the previous quarter. It had increased profit by the same measure from US operations to $30m from $2m, it said.

Sappi said it expected growth of as much as 8 percent a year in the global specialised cellulose market to return it to profitability in fiscal 2014.

“Dissolving wood pulp accounted for 12 percent of sales in fiscal 2013 and 95 percent of operating profit excluding special items,” chief executive Ralph Boettger said last week.

Earnings before interest, tax, depreciation and amortisation for dissolving wood pulp were more than 30 percent of sales in the year to September compared with about 6 percent for paper, he said.

36One Asset Management analyst Jean Pierre Verster said the company was building its investment case around the dissolving wood-pulp business and this would determine whether it would succeed in achieving its financial goals.

“There is concern about increasing supply of dissolving wood pulp coming on stream,” he said. “They might be jumping from the frying pan into the fire if it does happen that a supply glut forms.”

Sappi had net debt of $2.2bn at the end of fiscal 2013, according to regulatory filings.

It had no plans to issue new debt in the current fiscal year and bonds falling due would be repaid from $385 million available cash, Boettger said.

Sappi shares rose 0.93 percent to close at R29.44 on the JSE yesterday, while the forestry and paper index rose 1.34 percent. –


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