DURBAN - Sappi slumped more than 7percent in early trade yesterday before clawing back some of the losses after the paper and pulp manufacturer announced first-quarter results that fell below market expectations.
The group said the results were negatively impacted by a stronger rand as compared to the dollar and increasing paper pulp costs.
The shares closed 3.21percent lower at R81.74 on the JSE yesterday. However, chief executive Steve Binnie said the results were in line with group expectations.
“We continue to work hard to mitigate increased input costs and the impact of a stronger rand/dollar exchange rate,” Binnie said.
“We will begin to see the benefits of selling price increases during the rest of the financial year.”
Binnie said the dissolving wood pulp (DWP) demand remained strong, with healthy earnings before interest, tax, depreciation and amortisation margin of 31percent and demand for specialities and packaging papers continuing to grow across all regions and all major product segments.
He said the acquisition of the Cham speciality paper business is due to be completed at the end of February. “This will significantly strengthen Sappi’s speciality and packaging papers footprint, skills, volumes, product offering, innovation and market presence,” Binnie said.
He said the conversions of the paper machines at Maastricht and Somerset would be completed in the second and third quarter respectively and would add to the company’s coated packaging capabilities.
Sappi signed an agreement to acquire Cham in December for about $149million (R1.79billion).
Sales for the quarter to end-December increased to $1.33bn, up from $1.31bn, while operating profit decreased to $116m, down from $143m compared with last year.
Profit declined to $63m compared with last year’s $90m and headline earnings per share lowered to 12 US cents a share, down from 17c a share.
Binnie said the company expected capital expenditure to be about $500m in 2018 when it completed the conversions at Maastricht and Somerset mills, the Saiccor, Ngodwana and Cloquet debottlenecking projects and started the upgrade of the Saiccor woodyard.
“These projects are focused on higher margin growth segments including dissolving wood pulp and speciality packaging. This will position us for stronger profitability from 2019 onwards,” he said.
Cobus Cilliers, an investment analyst at 36ONE Asset Management, said Sappi’s first-quarter results came in below the market’s expectations, mostly as a result of once-off items.
Cilliers said the items included the maintenance shutdowns, one less trading week compared to the last year’s first quarter as well as a write-down of a deferred tax asset in the US due to lower tax rates.
However, he said the stronger rand also had a significant impact on the company’s results, as they reported in US dollars.
“When we strip out the once-off items, we have a positive view on the company’s growth prospects,” he said.
The group expects second-quarter operating performance to be slightly below that of the prior year as the impact of the stronger rand and lower comparative US dollar DWP prices negatively impact the South African operations.