Mathabo Le Roux
7 November 2008
Johannesburg — PAPER manufacturer Sappi has scored something of a psychological victory, with indications that price increases of 7% introduced in the European market are sticking.
Europe has resisted increases for seven years, spoilt by a glut in the market. But capacity reductions of 1-million tons of coated wood-free paper (about 10% of total capacity) and increased consolidation in the market are expected to ease the supply and demand balance, improving prospects for Sappi.
Sappi posted a loss of $0,14 per share in the fourth quarter to September, compared to earnings of $0,33 in the same period a year ago, but better than the loss of $0,28 in the third quarter. But earnings were negatively affected to the tune of $0,35 by once-off expenses related to mill closures and fire damage to plantations.
Operating profit, excluding special items, came in at $89m, a slight dip from the previous quarter's $88m, and 8% lower than a year ago. Operating profit for the year was $314m, compared to $383m last year. With special items stripped out, profit rose 17% to $366m, on an 11% rise in sales to $5,9bn, driven mostly by higher prices.
Despite expectations that demand will slow in major markets in the near term on turmoil in world financial markets, Sappi CE Ralph Boëttger said he was cautiously optimistic about future prospects. Margins are still being squeezed by high input costs, such as for wood, energy and chemicals. But Boëttger said raw material prices were in the trend of getting lower and this would bring relief.
"We achieved quite solid results under difficult conditions and the most important factor is that price increases are sticking in the EU.
"We do expect demand to come down, but not as much as luxury products, for instance."
Sappi is now looking at a period of consolidation -- easing capital expenditure and bringing down debt levels.
Gearing is at just under 50%. But the company plans to fund its € 750m acquisition of European coated graphic paper business M-real -- which got the thumbs-up from the European Commission last week -- mostly through equity, which will help strengthen balance sheet ratios.
Sappi expects to realise synergies worth € 120m from the M-real acquisition. The transaction will increase Sappi's European market share to 30%, setting it up as a "clear market leader", Boëttger said.
During the quarter, Sappi's Saiccor expansion project was commissioned and is ramping up. Sappi expects production to reach full capacity in the first quarter of next year, bringing annual chemical cellulose output to 800000 tons -- an increase of 225000 tons. With 99% of Saiccor output exported, Sappi is set to benefit handsomely from the weaker rand.
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