Sappi posts poor Q1 profits

January 28, 2002 Posted: 1500 GMT

JOHANNESBURG, (Reuters) - South Africa's Sappi posted sharply lower first-quarter earnings on Monday, but the paper and pulp group's share price rose six percent on relief the results were not worse and on hopes of an economic turnaround.

In a tough market, headline earnings per share -- which strip out exceptional items and their tax effects -- dropped to 14 U.S. cents in the quarter to end-December 2001, from 34 cents in the year-earlier quarter.

The group said it expected quarterly profits for the rest of the year to return to levels seen in its fourth quarter, when it reported headline EPS of 23 cents.

First quarter sales fell to $832 million from $1.1 billion a year earlier, and operating profit dived to $65 million from $143 million, as demand sank amid a host of global economic woes.

Analysts said the results were towards the upper end of expectations after the group warned last year of a sharp first-quarter decline due to a slowdown in North America, which was exacerbated by September's attacks on New York and Washington.

But investors were uncertain, sending Sappi shares see-sawing. They slipped 1.4 percent at the start of trade, but then turned positive to trade six percent up at 133.80 rand. At 1300 GMT they were up 4.9 percent at 132.40 rand.

"The market is now looking beyond this quarter... If the global recovery gets back on track, earnings should return to more reasonable levels," Deutsche analyst Greg Hunter said.

"Sappi is still trading at a big discount to its European and U.S. peer group. It's a quality, well-managed company in a sector that is consolidating, so it looks to be a target and that should support the stock," he added.

Analysts said it would also continue to take support from the company's share buyback programme, which it is only half way through.

Sappi is trading one and a half times higher than its January 2001 levels, helped mainly by a sharp fall in the rand, as the group earns a large chunk offshore.

It has also been helped higher by repeated talk that it could be a target for larger international paper groups.

Sappi said it was "cautiously optimistic" on earnings for the rest of the year.

"Barring further deterioration of the global economy, we expect quarterly earnings per share for the rest of the year to improve and to be similar to the level of those seen in our fourth quarter 2001," it said.

Although that sounded upbeat, analysts pointed out that a repeat of the 23 cents seen in the fourth quarter for the next three quarters, plus the first quarter's 14 cents earnings, would mean annual headline earnings per share of around 83 cents. That is lower than current market expectations of 120-130 cents a share and last year's 113 cents.

Sappi said industry shipments of coated wood-free paper for the first quarter were 13 percent lower than a year earlier in the United States, and one percent lower in Europe.

Prices in Europe were fairly stable, while prices in North America continued to fall.

But Sappi said the geographic spread of its assets and markets helped mitigate the sharp drop in North American demand, which resulted in an operating loss in that region.

Its results were also affected by a routine maintenance shutdown at two of its largest operations in the quarter, the effect of which had in the past been spread over 30 months. To comply with International Accounting Standards, the full impact of the shutdowns was reflected in the first quarter.