Sappi makes shareholders happy

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Sappi makes shareholders happy
Credit: © Reuters.

Sappi (JO: SAPJ ) was the talk of the market yesterday after releasing a strong quarterly update for the period ended December 2021. The share price rallied 20% in response before settling down to be 14% up in afternoon trade.

The company provides materials made from woodfibre-based renewable resources. There are raw material offerings (like pulp and timber) and end-use products (like specialist papers and forestry products).In this quarter, sales increased 46% and EBITDA increased by a whopping 145% as the benefit of operating leverage came through in a period of great top-line growth. The group has swung from a loss of $17 million in the corresponding quarter in 2020 to a profit of $123 million in this quarter.

Sappi does highlight that an extra trading week in the quarter had a positive impact on EBITDA of $25 million. If we adjust for that, then EBITDA grew by 119%. That's not exactly a shabby outcome either.

The result was driven by a combination of high product demand and increases in sales prices, so the group has exhibited pricing power that is important in an inflationary environment.

Sappi is still struggling with the supply chain issues that are still causing havoc in many industries. The company was unable to reduce the sales backlog due to ongoing logistical challenges and the adverse weather in December at the Durban Port.

Volume growth has been superb, with pulp volumes up 48% and packaging and speciality papers up 26%. Graphic papers increased volumes by 20%, which helped restore EBITDA margins for the segment.Net debt has decreased by 7%, which helps drive an expansion in equity value. This is despite seasonal working capital outflows and capital expenditure during the quarter of USD72 million for the Saiccor Mill expansion. Capital expenditure for FY22 is estimated to be $395 million.

The company's outlook is that the next year will be characterised by high input costs and ongoing vessel shortages. This makes volume growth and pricing power critical, or margins will come under pressure. The company is bullish on demand for its products and expects a further improvement in EBITDA for the second quarter of FY22.

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