Sappi delivered “robust” full-year and fourth-quarter results on Thursday, based on “strong growth” from speciality packaging and its dissolving wood pulp business.
Full-year profit of $338m rose from $319m in 2016, although fourth-quarter profit of $102m lagged the $112m of the matching quarter a year ago. The group further reduced debt in the period, as it continued to reorientate operations away from core fine-coated paper used in advertising materials and upmarket magazines. The focus is on high-margin dissolving wood pulp — used in making clothing and textiles — and specialised packaging products.
Capital expenditure in 2018 was expected to increase to $450m as it continued to convert mills in SA, Europe and North America to facilitate greater production of these products, the group said. “The increase in expansionary capital spending during 2018 is focused on higher-margin growth segments including [dissolving wood pulp] and speciality packaging,” said Sappi CEO Steve Binnie. “This will position us for stronger profitability from 2019 onwards.”
He was particularly pleased with the 36% jump in Sappi’s dividend to $0.15 per share.
Group net debt was $1.322bn, down $86m year on year in the full-year period to September. Net cash for the year and quarter was lower than in 2016 as a result of expenditure on growth projects, increased taxes, the higher dividend payment and higher working capital costs.
“Our success in bringing our debt levels to below our targeted leverage ratio of less than two times net debt to [earnings before interest, tax, depreciation and amortisation] in the prior year meant we could turn our attention to increased investments in growth projects, with the main focus being on conversions of paper machines in Europe and the US to speciality packaging grades and dissolving wood pulp debottlenecking projects in SA,” Binnie said.
The 2017 dividend was covered four times by basic earnings per share, excluding noncash special items. The group aimed to declare continuing annual dividends and achieve a long-term average earnings-to-dividend ratio of three to one. Mish-al Emeran, an analyst at Electus Fund Managers, said Sappi’s results were slightly better than expected because of good cost control across its divisions. But while management had done well to turn the group around, “the low-hanging fruit has been picked”.
“Going forward [they] need to strike balance between growth and risk of oversupplied markets. We think the share price reflects the turnaround, [but] key catalysts have played out.
“Dissolving wood pulp is the key area of growth for Sappi, but it’s an area where there could be significant additional global supply in the medium term.”