Sappi builds profit on shift to cellulose

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Nompumelelo Magwaza

Sappi had benefited from the strategic decision to invest in and grow the specialised cellulose and dissolving wood pulp businesses, it said in its first-quarter results yesterday.

The biggest manufacturer of glossy paper increased profit to $18 million (R201m) in the three months to December from $12m in the same quarter a year earlier. It swung from a restated loss of $149m for the September quarter.

“We continue to generate good returns in the specialised cellulose business, and the dissolving wood pulp market experienced strong demand in an increasingly competitive market,” Sappi said.

Earnings before interest, tax, depreciation and amortisation, excluding special items, was $147m and the operating profit, excluding special items, was $60m.

Chief executive Ralph Boettger, who will leave Sappi in June because of ill health, said the results showed a return to profitability on the back of major strategic changes to expand and grow high-margin businesses, specifically the specialised cellulose venture.

Capital expenditure for the full year is expected to be less than $300m. This, along with the forecast of better profits, should allow Sappi to reduce debt to $2 billion by the end of the fiscal year.

Sappi has recently opened mills for dissolving wood pulp in South Africa and North America to raise exposure to the product, which carries a higher profit margin than paper. The material is used to make textiles, including modal, which in turn is used to make apparel such as lingerie.

The southern African specialised cellulose business performed well but net selling prices for wood pulp were flat compared with the previous quarter. The South African paper business returned to profit, aided by the weaker rand.

Boettger said Sappi was benefiting from the weaker rand and the company was exporting a large portion of products from South Africa.

“We prefer the weaker rand but the extremely volatile weaker rand is not good in the longer run because it puts a massive pressure on us in terms of operations in the South African economy,” Boettger said.

Despite tough trading conditions in Europe, Sappi’s operations there remained a large part of the business. Sappi was investing in its low-cost large mills to further reduce costs in the European business.

Sappi shares slid 2.2 percent to close at R34.30 on the JSE yesterday.

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