NOT YET OUT OF THE WOODS
SAPPI’S PLANTATION fair value adjustment of US$29m before tax (R208,5m) masked what were really lacklustre results for the first quarter (end December) of its financial year. Overall the numbers are improving, but perhaps not enough to suggest that Sappi is out of the woods.
The local market seems to share this view. Sappi’s share price initially climbed convincingly to R105,50/share when the results were released, but by the middle of last week had slumped back to R102,75.
Not that we are suggesting the valuation was deliberate. Plantation fair value adjustments are “unpredictable”, according to Sappi chairman and acting CEO Eugene van As. But the timing of this particular valuation was convenient – without it operating profit would only have risen 28,6% year-onyear instead of the reported 87,8%. More telling perhaps is the decline in return on equity between the first quarter and last quarter of the previous financial year from 11,7% to 8,4%.
It’s also notable that the local Sappi Forest Products division was a significant contributor to improved operating profit, after battling for a number of years. Firmer pulp prices and the weaker rand helped performance here.
The big test is going to be whether paper users in Europe swallow two price increases Sappi has pushed through. Sappi and other paper producers have been held hostage in Europe as overcapacity kept a firm lid on increases.
Looking ahead, Van As says Sappi expects earnings to improve further, though he adds that excludes the “unpredictable plantation fair value adjustments”.
Investors should probably be cautious too until there’s more predictability in Sappi’s earnings.