Sappi slumps on profit warning
Sappi’s shares closed down more than 5% on Wednesday, its biggest one-day drop in six months, after the pulp and paper group warned of lower profits in 2019 in Europe and North America.
Sappi’s shares closed down more than 5% on Wednesday, the biggest one-day drop in six months, after the pulp and paper group warned of lower profits this year in Europe and North America due to subdued demand. The weak graphic paper market added credence to the strategy to shift focus to the high-margin dissolving pulp and biotech segments.
Sappi produces dissolving wood pulp, packaging and speciality papers, printing and writing papers, as well as biomaterials and biochemicals.
Speaking at the release of the company’s results for the quarter ended December, Sappi CEO Steve Binnie said the graphic paper markets in Europe and North America have slowed down in recent months. Binnie said, if it persists, the soft demand would negatively affect short-term profitability.
He said Sappi expected earnings before interest, tax, depreciation and amortisation (ebitda) in the second quarter of financial year 2019 to be slightly lower than the same period in 2018 due to weak graphic paper markets and high paper pulp prices in Europe and North America.
Binnie, however, said the full year ebitda is expected to be above that of the prior year.
In the three months ended December 31 2018, Sappi’s net profit grew 29% to $81m, from $63m in the matching period in 2017. The group attributed the increase to strong demand for its dissolving wood pulp from Chinese clothes makers.
Dissolving wood pulp is used to produce viscose fibre for clothing and textiles.
“In a difficult operating climate, the resilience of the business and the benefits from the diversification of the product portfolio in recent years were emphasised during the quarter,” Binnie said.
Mish-al Emeran, an equity analyst at Electus Fund Managers, said the results were in line with expectations.
“I think market concerns stem from management’s cautious outlook for [the second quarter], specifically related to printing paper markets, which makes up more than 40% of ebitda,” he said.
“Demand declined faster than expected following price increases, and the business faced input cost pressure. While industry graphic paper capacity is expected to decrease, this might only materialise over the medium term, which implies price pressure for 2019.”
Ebitda, excluding special items, increased 15% while profit increased 29% compared to the same period last year.
“We continue to work hard to mitigate increased input costs and weaker global graphic paper markets. The dissolving wood pulp business continued to enjoy stable pricing and healthy customer demand,” Binnie said. The strategy to invest in higher-margin growth segments continues to bear fruit. “Overall sales volumes for packaging and specialities increased by 27% year on year.”