Sappi profit drops 12%

South African pulp and paper maker Sappi reported a 12% drop in quarterly profit yesterday as a rise in capital expenditure drove up depreciation costs, sending its share price almost 8% lower.

The company was the biggest faller on Johannesburg’s benchmark Top-40 index, as its shares pulled back from their highs for the year.

Sappi, which sees 45% of its sales in Europe and 23% in North America, said profit in the quarter ended June fell to $51 million from $58 million in the same period last year.

Capital expenditure reached $188 million, the company said, mainly due to a paper machine conversion at its Somerset paper mill and optimising production at its Ngodwana and Saiccor mills.

“The third quarter is seasonally and historically our weakest quarter due to the slowdown in business activity during the northern hemisphere summer holiday period, and Sappi’s choice to use this quarter to undertake major annual maintenance shuts,” Sappi said.

“The results were disappointing but you can’t look at results quarter by quarter only. You have to look at the bigger picture,” Cratos Wealth trader Ron Klipin said.

Sappi owns and also leases large tree farms and CEO Steve Binnie said the company was concerned about a government plan to expropriate land without compensation to rectify racial ownership imbalances.

It is in talks with various players involved in the saga, he said.

“We are concerned about the uncertainty it creates. We are engaging with the government and they have given us reason to believe it won’t have an impact on economic growth and jobs. We take some comfort in those comments,” he said on a conference call.

Earnings before interest, tax, depreciation and amortisation, which excludes special items, was flat at $155 million compared with the prior comparable period.

The company is expanding its South African Saiccor Mill, with a $570 million investment over the next five years.

“There is good demand growth for specialities and packaging papers.

“Given current market conditions and exchange rates, we expect our Q4 operating performance to be similar to that of last year,” the company said in a statement. – Reuters

The results were disappointing but you can’t look at results quarter by quarter only. You have to look at the bigger picture.

Ron Klipin Cratos Wealth trader