Sappi earmarks nearly R9.4bn for expansion and conversion

Paper and packaging group Sappi says it has earmarked an estimated $500m (about R9.4bn) for capital projects over the next two years, with a third of the funds to be funnelled towards expansionary capital expenditure.

The JSE-listed manufacturer managed to shave down its net debt to $1.085bn in 2023 — its lowest level in 30 years, positioning it well for growth.

In the group’s latest annual integrated report released on Tuesday, Sappi cautioned investors that its net debt levels would be rising in the near term due to the capex spend. Net debt comprises current and noncurrent interest-bearing borrowings and bank overdrafts.

“Given the capital-intensive nature of our operations, we need to raise debt to complete significant projects that enable our long-term success,” said Sappi.

“The significantly lower debt profile and healthy cash reserves provide us with the flexibility to navigate the headwinds of cyclical downturns, and have allowed us to begin the next phase of investments for growth in our target markets with the conversion and expansion of Somerset PM2 to solid bleached sulphate paperboard,” CEO Steve Binnie said.

The manufacturer generated $210m in cash for the year to end-September.

Sappi, which is valued at R24.8bn on the JSE, sells raw materials such as dissolving pulp, wood pulp, biomaterials and timber, as well as end-use products, including packaging papers, speciality papers, graphic papers, casting and release papers and forestry products.

SA is one of Sappi’s core operating regions alongside North America and Europe.

The pulp and paper producer has been looking to exit the graphics paper market in favour of moving towards the dissolving pulp and packaging markets.

Sappi’s capital expenditure of $382m for its 2023 financial year included $100m for the conversion and expansion of its Somerset Mill in North America to convert machinery from coated wood-free graphic paper to solid bleached sulphate board (SBS).

The conversion forms part of Sappi’s strategy to reduce exposure to graphic papers and grow in the higher-margin packaging papers segment.

As part of this strategy, it is also closing Stockstadt Mill and has initiated a consultation process for the potential closure of Lanaken Mill shortly after year end.

Sharply declining graphic paper demand due to weak consumer confidence related to the slowing global economy and an inventory destocking cycle that took longer than expected are at the core of the shift.

On Tuesday, the company said the higher capital expenditure for 2024 includes about $154m for the Somerset PM2 project, which is on track for commissioning in 2025.

Packaging and speciality papers constitute 26% of group sales volumes and nearly 30% of group earnings before interest, tax, depreciation and amortisation.

Binnie said Sappi’s capital investment programme is focused on operational efficiencies, enhancing product offerings, improving its environmental footprint and growing the group’s packaging business.

Sustainability capex of $350m includes a strong focus on reducing fixed and variable costs, slashing downtime and improving operating rates.

The Johannesburg-based company has been bogged down by several challenges including the logistics nightmare in SA characterised by poor railway infrastructure and port bottlenecks, weak demand and consumer confidence related to the slowing global economy.

The troubles at Transnet have dealt a blow to the economy as vital exports are held up on blocked roads and ships, with SA ports now rated among the worst in Africa.

In response, the manufacturer has adjusted to these challenges by increasing road transport routes, while working with its logistics partners to contain costs and shipping dissolving pulp from Ngodwana Mill to the port of Maputo in Mozambique, rather than the port of Durban.

In the face of robust demand for the pulp, the firm opened a bonded warehouse for it in China, with the first shipment taking place in March 2023.

Sappi said it is simultaneously deploying performance-based standard (PBS) road haul vehicles to mitigate the effect on timber deliveries from the northern part of KwaZulu-Natal.

The group said it is actively participating in the national logistics crisis committee (NLCC) — which has a direct reporting line to President Cyril Ramaphosa — focusing on immediate operational improvements in the logistics system, as well as longer-term reforms to improve efficiency and competitiveness.

Sappi’s share price rose 0.3% to R44.13 on Tuesday, but has slipped more than 43% in the past five years.

gumedemi@businesslive.co.za