Thabang Mokopanele
16 February 2009
Johannesburg — PAPER and pulp producer Sappi's gamble to buy M-real's four mills for R8,9bn could turn out to be an expensive mistake after Moody's Investors Service changed its rating outlook on the company to negative from stable and Goldman Sachs Group added it to the "conviction sell" list.
This comes after Moody's carried out rating actions on six European paper and forest products companies as a result of a "significant" contraction in demand affecting the paper industry in Europe, Middle East and Africa regions on top of persistent structural challenges in the global industry.
While Moody's affirmed Sappi's Ba2 ratings, it changed the group's rating outlook to negative due to its concerns about the profit and cash flow erosion the group suffered in the first quarter to December.
The rating agency said on Friday this was due to uncertainty with regard to whether pressures Sappi faced would persist for an extended period.
"The recent performance erosion was prompted by a significant decline in demand and pricing for pulp as well as demand contraction for fine paper in all regions while pricing in Europe remained relatively robust," it said.
Moody's said the change in the rating was in contrast to its expectations of constant improvements in credit metrics previously factored into Sappi's Ba2 rating, when it left the ratings unchanged after the group bought four graphic paper mills from M-real for R8,9bn in December.
Moody's said the negative outlook on Sappi reflected the challenge the group faced in preserving profitability in line with its expectations for the Ba2 rating category over the next few quarters.
The Ba2 rating was closely correlated to the sustainability of fine paper price increases Sappi implemented recently in Europe, the efficiency of further capacity curtailments and the realisation of expected synergies following the acquisition of M-real's graphic paper assets.
The negative outlook was also closely linked to Sappi's ability to preserve a solid financial flexibility, including a timely refinancing of debt maturities , Moody's said.
However, Moody's affirmed Sappi's Ba2 ratings, which it said reflected the group's market position as one of the "leading" global fine paper manufacturers with a good level of vertical integration and a track record of solid profitability .
Adding to Sappi's woes was an announcement by Goldman Sachs saying it had added Sappi to the "conviction sell" list, citing valuation and the outlook for earnings.
"We view Sappi shares as expensive on an absolute basis and relative to peers given the weak outlook for coated paper and pulp prices, which should hurt Sappi's earnings in 2009 and 2010," New York-based analysts Richard Skidmore and Alex Ovshey wrote on Friday.
Moody's last rating action was in June, when Sappi's ratings were downgraded to Ba2 with a stable outlook.
Sappi's operating profit fell to $57m for the quarter to December compared with $91m a year earlier due to plummeting global demand and a slump in prices.
Operating profit was $25m in the prior quarter. But operating profit excluding special items of $32m was $25m compared with $92m a year ago and $89m in the prior quarter.
Sappi's shares dropped 2,78% to R28 on Friday.
Be the first to Write a Comment!
Copyright © 2009 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
