Companies / 15 November 2019, 11:00am / Sandile Mchunu
DURBAN - Sappi tumbled more than 5percent in early trade on the JSE yesterday after the global diversified wood-fibre company said it would halt its dividend in the year to end September as profits fell 34.68percent.
The group blamed the continuing trade spat between the US and China, saying that it had hit dissolving wood pulp (DWP) prices and graphic paper markets in various geographies.
Sappi said its profit fell to $211million (R3.15billion) from $323m last year.
It said that it had taken a number of steps to mitigate the effect that the current uncertain market conditions and low-dissolving wood pulp prices are having on the profitability and leverage of the group.
“These steps include tighter working capital management, the postponement and reduction in capital expenditure,” Sappi said.
“The directors have furthermore concurred with management that it would be prudent to temporarily halt dividends until such time as market conditions improve.”
Sappi said its earnings before interest, tax, depreciation and amortisation (Ebitda) also eased 9.84percent to $687m from $762m while earnings per share decreased to 44cents a share from 60c the prior year.
Chief executive Steve Binnie said an initially strong start to the year was offset by weak graphic paper markets and lower DWP prices driven by the ongoing trade wars and slower economic growth in various geographies.
“Our Ebitda declined by 10percent year-on-year due to lower dissolving wood pulp prices and weak graphic paper demand. Our strategy to diversify our product portfolio into higher margin segments continues to deliver positive results,” Binnie said.
However, in the second half of the year the graphic paper segment started to benefit from a reduction in input costs, particularly paper pulp, helping to mitigate the impact of lower volumes.
Binnie said its business in North America improved in the last three months, but weak demand for domestic coated paper markets and lower DWP selling prices dimmed the profitability.
“I am pleased that we were able to generate cash of $173m in the quarter thereby ending the year with net debt at $1.50bn,” he said. “This was done by tightly managing working capital and postponing discretionary capital expenditure.”
Looking ahead, the group said that due to the current weak pricing in the DWP market and with paper markets yet to show signs of a sustained recovery in demand, they expected Ebitda in the first quarter of 2020 financial year to be below that of 2019.
“The markets we operate in are expected to continue to be challenging in the coming year, and profitability is likely to be negatively impacted as a result.
"DWP pricing, in particular, will have a significant impact on earnings as this segment is a major contributor to our profits and cash flow generation.
"We have responded by reducing our capital expenditure both this past year and the next, and other than the 110000ton expansion of Saiccor which is currently under way, we have not committed capital to any material project,” Binnie said.
Sappi shares closed 3.51percent higher at R37.46 on the JSE yesterday.