| Fri 12 Mar 2004, 12:11 | | Sappi on watch' alert amid jitters over its future |
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Sappi on watch' alert amid jitters over its future
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Credit agency cites low demand for products
Trade and Industry Correspondent
SAPPI's ratings were placed on watch by Global Credit Rating (GCR) yesterday in a move signalling concern about the pulp and paper group. .
The "watch" alert means a ratings downgrade may be imminent. Sappi had solid domestic currency long and shortterm ratings at A+ and A1 respectively.
The protracted trough in demand for the company's products was cited as one of the main reasons for the move.
The trough was already taking its toll on profit margins, and GCR said it posed a threat to Sappi's operating cash flows.
Sappi posted a loss for the first time for the December quarter last month since the group began announcing quarterly results in June 1999. The group blamed a series of unusual events, although it cautioned that the outlook remained uncertain.
Two analysts said yesterday the upturn in the high-end market, where Sappi had positioned itself, was taking much longer than expected to materialise.
"Everything is still okay with Sappi, but there are no signs of a definite upturn," said one of the analysts.
A downgrade in Sappi's ratings would result in a rise in the group's debt costs.
"Together with cash flow not improving, this would be a double whammy," said the analyst. "Ultimately a company could be unable to pay its debts, but it is not our view that this will happen in Sappi's case," he said.
Sappi's leading global position in the fine-coated paper, its geographically diverse earnings base and low-cost profile were highlighted as positive factors in the statement by GCR yesterday.
In addition to the trough in demand, however, the ratings agency based its decision on the group's significant exposure to changes in global production capacity, paper commodity prices and global economic cycle fluctuations.
Also, Sappi's high gearing at 88% in the first quarter of this year restricted its financial flexibility. Sappi was involved in a capital-intensive industry, which implied an above average measure of debt financing, said GCR.
One of the analysts said, however, that Sappi was not overly geared, particularly when compared with its US and European counterparts.
Sappi strategic development director Robert Hope said yesterday said the rise in gearing was mainly because of the movement in currency.
He declined to comment on GCR's announcement as he did not see this as a change in the ratings agency's position on Sappi.
GCR said the protracted downturn in the industry cycle was reflected by the downward trend in operating margins, which had fallen from 14,2% in the 2000 financial year to 6,7% in the past financial year.
"This trend continued into the first quarter of the 2004 financial year, with the difficult operating environment placing pressure on the gross profit margin..." said GCR.
"Although there is evidence pointing to an industry recovery, a protracted trough in demand may pose a threat to Sappi's operating cash flows and financial position, and accordingly the ratings were placed on rating watch," said GCR senior analyst Jackie Swan.
Sappi's share price closed 3,7% lower at R88,20 yesterday.
Mar 12 2004 06:55:03:000AM Carli Lourens Business Day 1st Edition
Friday
12 March 2004
