Sappi gets chance to show it is no mere paper tiger
SAPPI, the world’s largest manufacturer of dissolving wood pulp, appears to be turning a corner after a challenging period since the global financial crisis in 2008, the last year in which it paid a dividend.
CEO Steve Binnie this week said the company may consider reinstating a dividend once the group achieves its debt-reduction targets, possibly in 2017.
The company has manufacturing bases in Europe, the US and South Africa and exports its products to 161 countries.
In recent years, Sappi, which traditionally has produced paper, has diversified its product range to include dissolving wood pulp, which is mainly supplied to the textile sector.
It is also exploring speciality packaging opportunities, and a weaker rand has boosted its operations.
Sappi has been battling a number of challenges in the past few years. Changing media consumption patterns as a result of rapid technological advances have affected demand for its paper products.
Europe, where coated paper is used in high-end glossy magazines, remains Sappi’s biggest market. The US and South Africa each account for about 25% of group sales.
Binnie, who has been in charge for about 15 months since Ralph Boettger resigned due to ill health, acknowledged the drop in demand for coated paper products, but said they still made a sizable contribution to profits.
The R31.6-billion mid-cap company has been trying to reduce the debt accumulated in an international expansion drive in the past decade.
The net debt burden sat at R25.4billion in the 2015 financial year, down from R28.4-billion.
Sappi has underperformed relative to its closest competitor, Mondi, in the past five years. Its shares have risen 69%, compared with Mondi’s 465% in the same period.
But, judging by recent financial and share price performance, Sappi’s fortunes appear to be changing for the better. Net profit in the year to September was R2.5-billion — up 24% from the previous year.
The company has undergone a significant transformation in its portfolio, cutting costs and seeking new growth areas. Cape Kraft and Enstra Mill were recently sold to reduce debt, strengthen the balance sheet and direct resources to high-growth opportunities.
“Over the last few years we had to play a fine balancing act between reducing our dependency on our traditional paper business, paying down debt and focusing on cost reduction, while at the same time looking for new growth opportunities,” Binnie said.
The JSE-listed group identified dissolving wood pulp as a key engine for future growth, to offset declining margins in paper.
Dissolving wood pulp is used to manufacture a wide range of consumer products, such as clothing.
According to the company’s 2020 vision, dissolving wood pulp will contribute 40% to overall profits, trumping the paper business, which is expected to shrink to 25% from the current 47%.
“We believe it is a growing market. It competes with cotton in the textiles market. We are the lowest-cost producer and market leader in the space, and obviously the weaker rand plays in our favour,” said Binnie.
Patrick Mathidi, head of equities and multi-asset class at Aluwani Capital Partners, still prefers Mondi over Sappi, adding that he has not owned the stock since 2008.
His reasoning is the emergence of paperless and disruptive alternatives such as computer tablets, which depressed demand, especially for fine-coated paper mainly used in glossy magazines.
Mathidi said the glut in supply meant that any price increases would not stick, leading to depressed margins.
“Mondi managed to diversify away from consumer-based paper production to industrial container boards, and on the consumer side they diversified clients away from magazine paper supply to more value-add, highmargin stuff like highly specialised disposable paper production — baby and adult nappies, sanitary pads — where demand is a lot more resilient with some pricing power.”