Sappi flags escalating debt to $1.92 billion as a result of acquisitions

PULPWOOD and paper company Sappi yesterday flagged that its net debt escalated by $359 million (R5.31 billion) to $1.92bn in the first quarter to end December as a result of acquisitions.

The group acquired Matane Mill in North America for $181m during the quarter.

“The debt was higher than at the end of the equivalent quarter last year as a result of the cash utilisation in the quarter, the Matane acquisition which was financed through a new $181m eight-year term loan and the $92m non-cash impact resulting from the implementation of IFRS16,” the group said. The debt increased from $1.57bn compared to the same quarter last year.

Sappi reported that its earnings before interest, tax, depreciation and amortisation declined to $139m from $197m as a result of the transaction while profits fell to $24m in the quarter from $81m to last year.

Earnings per share excluding special items slowed to 6 US cents a share from US16c compared to last year.

Chief executive Steve Binnie said a good performance from the European and North American packaging and specialities segment and satisfactory results from the graphic paper businesses were not enough to offset the significant impact from the lower dissolving wood pulp (DWP) prices.

“DWP market prices fell by $272 a ton in the last year as the combined impact of soft global textile markets, excess viscose staple fibre capacity and a weaker dollar/renminbi exchange rate drove the DWP price downwards.

On the supply side, low paper pulp prices provided no relief for swing producers. This significantly impacted both the segment and group profitability levels,” Binnie said.

The group said its DWP prices remained under pressure, but had slightly risen from the lows of the previous quarter.

Sappi has fallen more than 17 percent since the beginning of the year.

Nesan Nair, a senior portfolio manager at Sasfin Securities, said the market had priced in the decline for some time. He said concerns over the company’s high debt however remained high. “Sappi has been trying for some time to reduce the debt and has had some success in the past,” he said.

“However, working capital commitments amid a tough pricing environment for its dissolving wood pulp and the cash-funded Matane Mill acquisition has pushed up net debt close to the uncomfortable $2bn level.”

Binnie said the group’s ongoing strategy to diversify the product portfolio into higher margin segments and position the company for future growth reaped rewards as the packaging and specialities segment continued to grow profitability.

“The focus on efficiencies and costs combined with strong customer relationships and service levels ensured profitability for graphic paper was stable despite weak global demand,” Binnie said.

Sappi rose 0.86 percent on the JSE yesterday to close at R35.76.