The share price of paper and packaging producer Sappi surged more than 14% on Wednesday after the release of its first-quarter results, which showed group recovery bolstered by robust market demand in all product segments.
Sappi, the world’s largest manufacturer of dissolving wood pulp, began the first quarter of its 2022 financial year on strong footing but said higher operating costs would remain a feature for the rest of the year.
Earnings before interest, taxation, depreciation and amortisation (Ebitda), or core profit, more than doubled to $240m in the three months to end-December year-on-year and was 36% higher than the preceding quarter.
“It’s been a very strong quarter for us, the second-highest in the history of Sappi,” CEO Steve Binnie told Business Day.
“Given the favourable demand outlook for all of our product segments, we anticipate a further improvement in EBITDA for the second quarter of the 2022 financial year, from the excellent results achieved in the first quarter.”
Sappi’s share price rose as much as 14.52% to trade at R51.82 after the announcement, before falling to R50.39 at about midday. The last time it pierced the R51 ceiling was in July 2019.
The manufacturer increased selling prices to head off high energy and other raw material costs, while aggregate demand in its suite of products such as graphic paper improved.
An additional sales week during the review quarter augmented sales and boosted Ebitda by about $25m.
“Our energy costs are rising, the freight costs, our chemical costs and rising timber costs in SA creates certain challenges, but we have been able to offset those with higher selling prices,” said Binnie.
“The fact that we have got strong markets in each of our segments has enabled us to do that,” he said, highlighting that aggregate demand in its suite of products such as graphic paper improved.
Pulp sales volumes increased by 48% compared to the prior quarter while packaging and speciality paper sales volumes rose 26% compared to a year ago across all regions and the graphic papers segment experienced boosted sales volumes by 20%.
Robust demand for containerboard was driven higher year on year as customers sought to replenish low stock levels after a very successful citrus export season, from which Sappi benefited.
“This achievement was despite logistics and transport bottlenecks, as well as significant increases in energy, pulp and other raw materials,” the company said in a statement on Wednesday.
Sappi said the logistical challenges and adverse weather conditions in December at the Durban Port prevented any reduction of the 100,000-tonne sales backlog accumulated during the fourth quarter of the 2021 financial year.
It also faced constrained global container vessel supply, which necessitated the use of alternative non-contracted ocean carriers and break-bulk shipping to fulfil customer shipping requirements, which pushed up delivery costs.
But higher profitability over the past year and a comparatively stronger dollar meant Sappi was also able to reduce net debt by $139m to $1.9bn from $2.056bn in December 2020.
“Going forward, we will see even higher profits to come in the next quarter, so we are going to generate a significant amount of cash this year and that is going to allow us to bring down debt further,” said Binnie, noting that Sappi had recovered to pre-Covid19 levels.
Chronux research analyst Sean Ungerer said that based on current fundamentals affecting the various business segments, the 2022 financial year was set to be a very strong year for Sappi’s earnings, which would facilitate a further reduction in gearing. But, he warned, “it would be prudent to manage net debt/ebitda below 1.0—1.5x on a consistent basis.”
Traditionally, Sappi has produced graphic paper but has in recent years diversified its product offerings to include the dissolving wood pulp that is mainly supplied to the textile sector.
The manufacturer’s Biomaterials segment, which uses cutting-edge technologies to extract more value from trees in new and adjacent markets, is also a growing segment that is finding many industrial uses, including in concrete mixes and in animal feed.
Binnie said the company was also exploring opportunities to extract sugar in wood fibre for different uses such as xylitol, a sugar substitute that also has industrial uses in cosmetic and pharmaceutical products such as toothpaste, mouthwashes, and fluoride tablets.
Sappi’s share price has climbed 5.82% over the past seven days of trade, rising 17.84% over the past six months.
mahlangua@businesslive.co.za and gumedemi@businesslive.co.za
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