DURBAN – Sappi shares plunged by more than 15 percent on Thursday after the leading global producer of dissolving wood pulp reported weak earnings as sluggish graphic paper demand and dissolving wood pulp prices weakened significantly in the quarter to end June.
The group's profits tumbled by 84 percent to $8 million (R115.99), down $51m compared to last year, due to the lower operating profit and a $9 million once-off finance costs charge to the income statement for the refinancing of the 2022 bonds.
Its earnings before interest, tax, depreciation and amortisation (Ebitda), excluding special items, declined by 24 percent to $118m while earnings per share (Eps) excluding special items declined by 60 percent to 4 US cents a share compared to last year.
Sappi chief executive Steve Binnie said although their third quarter was traditionally lower due to northern hemisphere summer holidays, the results for the quarter were under pressure.
“We faced challenging market conditions across all our major product categories, but in particular from sluggish graphic paper demand in Europe and North America, which necessitated production downtime and weak dissolving wood pulp (DWP) prices due to soft viscose staple fibre (VSF) markets. In addition, annual maintenance shuts which impact production and sales volumes were completed at Ngodwana, Saiccor and Cloquet mills,” Binnie said.
Jordan Weir, a trader at Citadel, said this was a disappointing set of results for the company, although it was somewhat understandable given that many companies were feeling the heat in a slowing global economy.
“The fact that the company paid a once-off finance charge of $9m also didn't help its bottom line for the quarter. With overall sales having slipped due to weaker demand, it’s likely that a drop in selling prices and profit margins will have impacted a range of products within the paper industry. The effect of this has ultimately reduced overall profits earned compared to the previous year. The fact that demand was higher last year also didn't assist Sappi, when comparing the two periods,” Weir said.
In the light of a difficult quarter, Binnie said the group continued to focus on executing its strategy to diversify its product portfolio into higher margin segments to position them for future growth.
Nesan Nair, a senior portfolio manager at Sasfin Securities, said this was going to be a very disappointing year for Sappi.
“They pointed to very weak viscose markets, maintenance and a once-off finance charge for the drop in profits.
"Investors must be aware that these are cyclical businesses that can experience volatile profits quarter on quarter as demonstrated in the 80 percent fall this quarter,” Nair said.
Sappi also announced that it had signed an agreement to acquire the 270 000 ton Matane high yield hardwood pulp mill from Rayonier Advanced Materials for $175m.
The group said the transaction would be funded through internal cash resources and available debt facilities.
Sappi shares closed 14.66 percent lower at R44.53 on the JSE on Thursday.