Ukraine, Russia woes smack Sappi

PAPER company Sappi has been a perennial underperformer for years, disappointing its long-suffering investors, including Allan Gray.

PAPER company Sappi has been a perennial underperformer for years, disappointing its long-suffering investors, including Allan Gray.

And just when it seems things are turning around, a new obstacle blocks its path.

This time, it seems the political crisis in Russia and the Ukraine has hit Sappi's sales.

Sappi has typically sold its paper into eastern Europe from its operations elsewhere on the continent.

CEO Steve Binnie said: "We are still selling into these countries, but it has had an impact on our business. Our average monthly sales were à10-million (R143-million) and have dropped to about à8-million."

Though the company managed to return to profit for the third quarter, it seems the market was expecting far more.

Sappi shed 5.4% on the JSE on Thursday after it announced its results for the June quarter, wiping R1.25-billion off its market capitalisation of R22.5-billion. This stalled a remarkable recovery over the past 12 months, in which Sappi's share price climbed 83% - ahead of the JSE's All Share index.

Analysts still rate Sappi's stock as a buy, but the red flags flying this week will introduce some caution into that outlook.

Sappi, which also has operations in North America and reports profits in dollars, has been facing headwinds due to a fall in demand for glossy paper as tablet computers and e-readers take a bite out of the traditional magazine industry and retailers rely more on web adverts than printed catalogues.

While this weighed on Sappi, the group managed to return to profit for its third quarter, thanks mainly to cost cuts in its European business, which compensated to some extent for weak paper prices.

The group posted headline earnings a share of 9c US (32c) for the June quarter versus its loss of 9c US a year earlier.

Sappi has closed some paper mills to focus on higher-margin businesses such as chemical cellulose, which is made from wood and used in clothing, plastics and pharmaceuticals.

Sappi is now the largest manufacturer of chemical cellulose.

Though Sappi remains a blue chip , it has disappointed investors, having frozen dividends since 2008.

Binnie said Sappi would start paying dividends again only after it had cut its debt to below two times its earnings.

"We are not sure exactly when we will get there, but it's unlikely to be in the 2015 financial year," Binnie said.

"So we wouldn't be resuming dividends this year or next year."

Sappi's net debt stood at about $2.3-billion at the end of June, which translates to about 3.7 times earnings before interest, tax, depreciation and amortisation. - Reuters