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February : Strong start to the year for Sappi

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10 February, 2015

Strong start to the year for Sappi

By : Nick Hedley


Sappi's shares last week traded at over R50 for the first time since 2008. The significance of that year is that it was then that the pulp-and-paper company purchased a coated graphic paper business in Europe, which helped bury it under a pile of debt during the global financial crisis.

The company, which last year managed to reduce net debt to below US2bn, has had a strong start to the year, having traded at R39,77 on 5 January. Its stock has broken through a number of resistance levels to briefly breach R50 last Friday before profit taking made it dip back to R47,70. While Sappi is still some way off its R100-plus highs of the early 2000s, new CE Steve Binnie has some analysts looking at the company with renewed interest.

The worst is over

Independent analyst Drikus Combrinck compares paper to another "stagnating industry" - tobacco. "The few tobacco companies that have remained have become very profitable, and I think that is something you will see with this industry as well. The pricing power of a company like Sappi will only increase; the worst is over for the industry," Combrinck says.

A few things are in Sappi's favour. They include the oil price slump, which reduces the price of chemical inputs, and Chinese restrictions on dissolving wood pulp imports from many areas but not SA. Combrinck also says Sappi's plans to generate new revenue sources from waste streams now appear to be achievable because technology allows these processes to be cost competitive.

Also, with SA's electricity grid under strain and paper companies able to supply surplus power to it, the prospects for cogeneration are improving.

One risk on the horizon is uncertainty about how SA's carbon tax legislation will affect paper companies. Sappi's view is that its carbon emissions are offset by its renewable, wellmanaged forests, which absorb carbon dioxide. The industry is hoping for some leniency for this reason.

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