Pain for gain strategy saps Sappi’s profit

Paper and pulp maker Sappi said yesterday its profit for the full year fell 4.4%, as it ramped up investment to modernise plants and shift production to more profitable products.

The company, whose European and North American operations contribute 51% and 25% of Sappi’s sales respectively, said profit fell to $323 million from $338 million.

The company said projects in its European and North American paper facilities as well as the revamping of some South African pulp plants increased capital expenditure.

The investment is part of a “further shift in the product mix of the group away from the traditional graphic paper business towards higher margin and growth”, Sappi stated.

Capital expenditure was $146 million, the bulk of which was contributed by projects undertaken at the Ngodwana and Saiccor pulp mills in SA.

“We are feeling pretty satisfied despite the fact that we have come in flat after all of those production stoppages,” group CEO Stephen Binnie said.

Earnings before interest, tax, depreciation and amortisation, which excludes special items, fell to $762 million from $785 million in 2017.

Fourth-quarter profit was up 4.9% while annual sales rose to $5.8 million.

A final dividend of $0.17 was declared.

“The results were largely in line with expectations with the operational challenges in the early part of the year negatively weighing on some of the performance in the fourth quarter,” said Wade Napier at Avior Capital Markets.

Sappi said its profits also came under pressure from the firmer rand during the first half of the 2018 calendar year, but it expected a shift should current dollar strength persist.

“Nearly all the product from our South African business is exported so a stronger currency effectively reduces our profit.

“Now that the rand is weaker than it has been for much of the previous financial year, we feel a little better going forward,” said Binnie.

Napier said improved local profits should be sufficient to offset the decline Sappi expects in its European market as a result of a projected economic slow down.

The results were largely in line with expectations after the operational challenges in the early part of the year. Stephen Binnie Sappi CEO