Shares in paper and packaging group Sappi lifted as much as 9.7% on Thursday after the group reported its best quarterly and annual results to date and resumed dividends after an improved performance.
The share price rose as high as R58.32 intraday as the group valued at R31.3bn on the JSE declared a dividend of $0.15 (R2.61) per share in the year to end-September and its net profit surged from $13m to $536m.
Sappi delivered record quarterly earnings before interest, tax, depreciation and amortisation (ebitda) excluding special items of $391m. Earnings per share for the quarter excluding special items rose to $0.44c from $0.39c in the prior quarter.
“It’s been a record year for us, the best year in our history,” CEO Steve Binnie told Business Day. “Also, it’s the best quarter in our history.”
The company did, however, face several headwinds, including extreme weather-related events, the lingering effects of the Covid-19 pandemic lockdowns in China, high inflation triggered by Russia’s invasion of Ukraine and global supply chain disruptions. However, some of the rising costs were offset by higher sales prices.
Sales for the year were up more than one-third to $7.3bn, while the cost of sales increased by a quarter to $5.93bn.
The most sales in terms of metric tonnes were of graphic paper (43.4%), followed by packaging and speciality paper (one-fifth) and then in forestry (18.51%). Geographically, Europe led with 40% of sales followed by SA (37.85%) and the US. However, sales in the US generated more money than those in SA.
Binnie said Sappi’s board moved to approve a $418m investment in its Somerset Mill in North America to convert machinery from coated wood-free graphic paper to solid bleached sulphate board (SBS).
This is in line with the group’s strategy to reduce its exposure to falling graphic paper markets and facilitates the transition of Sappi’s portfolio to packaging and speciality papers, pulp and biomaterials.
“As we have repositioned the business, packaging and speciality is less volatile. This further investment will cement that change,” said Binnie.
Packaging is a key growth segment for Sappi and the group has made a series of investments over the years into that business.
Somerset produces 240,000 tonnes and the upgrades will push this to 470,000 tonnes.
“The reason we’re investing there is we have seen huge demand for the product where there’s been a shortage,” said the CEO.
“We could literally fill that machine tomorrow, [as] our customers are begging us for more volume and that’s why we have made the commitment — the project is very attractive for us,” Binnie said.
The expansion is expected to be completed in early 2025 and will be funded by free cash flow from operations.
In a bid to further reduce its exposure, Sappi signed an agreement in September with Aurelius Investment Lux One Sàrl to divest the Maastricht Mill in the Netherlands, Stockstadt Mill in Germany and Kirkniemi Mill in Finland.
The €272m (R4.814bn) deal, which is subject to various standard suspensive conditions, is expected to close in the second financial quarter of 2023. Sappi noted the proceeds will be used to further reduce debt, which will provide a platform for future expansion in its identified growth market segments.
Meanwhile, the group based in Johannesburg outlined its new strategic objective to reduce its debt down to a net target of R1bn.
In the reporting period, Sappi’s net debt was reduced by 40.2% to $1.16bn, the lowest in its history, according to Binnie, who added that the reduction has given Sappi greater flexibility to withstand any of the challenges that the economic situation may bring.
In its outlook, Sappi noted that macroeconomic uncertainty has increased in recent weeks amid concerns over zero-Covid lockdowns in China and the geopolitical turmoil in Europe because of Russia’s war in Ukraine, all increasing the possibility of a global recession in 2023.
It highlighted that this poses a risk to its business as weakening consumer sentiment and diminishing discretionary spending would be likely to weaken demand in the graphic paper and dissolving pulp segments in upcoming quarters.
Binnie said: “We recognise the global macroeconomic volatility and uncertainties remain a significant risk to our business and have therefore set a new long-term strategic objective to target debt of approximately $1bn.”
He added that this objective coupled with strong expected future cash generation would provide sufficient opportunity to fund growth in Sappi’s targeted market segments.
One of the fallouts from the war has been rising input costs, despite recent drops in the price of natural gas and pulp.
Sappi expects a fire at a municipal electrical substation in KwaZulu-Natal and the recent strike at port and freight rail operator Transnet to affect sales volumes in the first quarter.
By the JSE’s close on Thursday, Sappi’s share price had pared gains to trade 1.93% higher at R54.93.
Update: November 10 2022
This story has been updated with CEO commentary and new information.
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