Sappi set for 8-year high after profit surge

Johannesburg - Sappi [JSE:SAP] is on track to close at the highest level since 2008 after the South African producer of dissolving wood pulp reported an eight-fold rise in quarterly profit, helped by higher sales prices for the cotton substitute and a weak rand.

The stock gained as much as 11% to R76.98, set for its highest close since June 2008, and traded at R76.33 at 12:24 in Johannesburg. Almost 2 million shares traded, more than the three-month daily average.

Sappi is diversifying its production as the demand outlook for glossy paper weakens. Net income for the three months through June rose to $32m from $4m a year earlier, the company said in a statement on Thursday.

Sappi benefited from higher US dollar prices for dissolving wood pulp, which is used in textiles including lingerie and golf shirts.

The pulp-and-paper maker is also seeking to reduce costs and cut net debt, which declined for a fourth consecutive three-month period to $1.58bn from a peak of $2.8bn in the third quarter of 2009.

The company is closing in on its debt-reduction target of two times earnings before interest, taxes, depreciation and amortization, chief executive officer Steve Binnie said in a phone interview.

"We’re very, very close to those levels now and hopefully we should get there before the end of this financial year," Binnie said.

Brexit fears

Sappi’s dissolving wood pulp prices are being supported by demand and are expected to remain at current levels in the coming months, Binnie said. Earnings also benefited from lower costs in the graphic paper unit and the weaker rand against the dollar.

Fourth-quarter Ebitda, excluding one-time items, will probably be in line with the same period last year, Sappi said, although a drought in South Africa and the impact of the UK’s vote to leave the European Union could weigh on the results.

"If the pound remains weak then clearly the players in the UK market will need to think about their pricing strategies to offset the currency impact, so we will look at that as well," Binnie said.

Mondi , another South African company with its roots in paper, also reported increased profit on Thursday, helped by higher volumes in its consumer packaging business.

Mondi [JSE:MNP], which was spun out of Anglo American [JSE:AGL] in 2007, gets the majority of its revenue from packaging products and continues to seek growth in that market, chief executive officer David Hathorn said.

The second half will be impacted by planned maintenance shuts at a number of mills, the company said.

Mondi shares declined 2.1% to R279.45, valuing the company at R136bn.

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