NOT YET OUT OF THE WOODS

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

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.

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