| Tue 9 Nov 2004, 12:15 | | Sappi shares dive as rising oil prices, costs stri |
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Sappi shares dive as rising oil prices, costs strip off first-quarter earnings
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PULP and paper group Sappi`s shares plunged close to 10% yesterday after the group reported weaker annual results and
warned of a possible decline in earnings in the first quarter of its new financial year.
Sappi, the world`s largest producer of fine-coated paper, said headline earnings dropped almost 35% to $0,45 a share for the
year to September. This was lower than analysts` expected $0,48 a share.
The group warned that rising input costs, such as those related to oil, would have a negative effect on the business.
Demand grew strongly in the US and Europe in the previous quarter, but Sappi said higher input costs would negate the
benefits of improving market conditions.
Rising costs and other factors such as repairs and maintenance would `make it difficult to achieve positive earnings” in the first
financial quarter, warned CEO Jonathan Leslie yesterday.
A top paper and pulp sector analyst in SA said he was shocked by Sappi`s first-quarter outlook. The unnamed analyst said
Sappi had been expected to put in a much stronger.
He was also disappointed with Sappi`s operational performance, particularly with its inability to get price hikes through in some
markets in Europe, where the group generates 45% of its sales.
Leslie was, however, positive about the medium-term outlook.
He said a cyclical recovery was clearly under way with price increases for fine-coated paper in North America and strong
volume growth, particularly in Europe and SA, in the fourth quarter.
After a period of weak prices and overcapacity, recovery of the global paper market is long overdue, but coincides with rising
input costs. Leslie said each $1 increase in the oil price hit earnings a share by $0,01.
The group reported an increase of 10% in sales to $4,7bn for the full year. Operating profit was almost 31% lower at $188m,
mainly as a result of low prices in operating currencies, the effect of the strong rand on local margins and higher wood and
energy costs.
Leslie warned that if the rand remained at its current level, it would have a `detrimental effect” on Sappi`s future earnings. South
African operations generate 26% of group sales.
Leslie said the group was profitable at current levels, but every 10% strengthening in the rand against the dollar reduced
earnings by $0,20 a share.
The stronger rand has also seen import pressure driving prices down as much as 9% on some products in SA.
At North American operations, which generate 29% of group sales, prices for coated paper started to improve, said Sappi.
Prices remained stable in Europe, despite Sappi`s earlier expectations of implementing significant price increases. Leslie expected significant price improvements in the beginning of the new calendar year. But the first financial quarter would
reflect scheduled maintenance downtime across the group.
This, together with rising energy and raw materials prices and a charge from the implementation of a new South African
accounting standard relating to secondary tax on companies, would make it difficult to achieve positive earnings in the first
quarter, said the group.
Sappi declared a dividend of $0,30 for the year, compared with a $0,29 in the previous year.
The group is on watch for possible downgrading by several ratings agencies including Moody`s and Global Credit Rating,
which said yesterday it would review Sappi`s rating early next year.
The group`s share price closed at R79,25 yesterday, down from about R160 early in 2002.
