Sappi’s first-quarter results for the period ended-December continued their upward trend with profit of $90m from $75m in the same period in 2016.
Half of the group’s sales are in Europe, followed by North America at 27% and Southern Africa at 23%. Although the paper market has been in decline for a considerable period, coated paper still made up 59% of the product basket and speciality paper accounted for 11%. Chemical cellulose accounts for 19% of sales.
About 37% of Sappi’s operating assets are in Southern Africa, 35% in Europe and 28% in North America.
Group sales were marginally up from the period in 2015, but slightly lower than in the fourth quarter to September 2016. The group says this is attributable to better volumes across its main product categories. It includes higher dissolving wood pulp (chemical or specialised cellulose) prices and savings. But these were offset partially by lower selling prices for graphic paper. Meanwhile, an additional accounting week in the quarter boosted income by $20m.
“The results were unsurprising. The good aspects remain good — chemical cellulose — while the weak aspect remains glossy paper,” Wade Napier, an analyst at Avior capital markets, said on Wednesday. He said a debt of $1.4bn as at the end of September 2016 was no longer a problem.
But Napier said the outlook for Sappi was “quite encouraging” as it moves away from glossy paper to specialty packaging and chemical cellulose.
Sappi said its operating performance in the quarter was satisfactory, generating earnings before interest, tax, depreciation and amortisation (ebitda) of $201m, from $175m in the quarter in 2016. “Dissolving wood-pulp markets remained robust, with strong demand driving spot prices to four-year highs in October, before declining towards the end of the quarter, albeit at relatively high levels.”
“As a result, the specialised cellulose business delivered strong returns, with ebitda excluding special items of $95m,” the company said.
Napier said chemical cellulose remained “the bedrock of Sappi’s business” given its low cost and high margins. “It remains to be seen how successful Sappi’s large-scale shift into specialties will turn out.”
He said that demand in the graphic paper business continued to decline at about 3% or 4% a year. “I’m expecting [these] input costs to begin rising. Hence margins are likely to decline and Sappi would have needed to idle production or convert. As [mentioned] they are going down the conversion route,” Napier said.