As the paper industry struggles to recover from a slump caused by anaemic demand and overcapacity, Sappi has closed mills and is targeting higher-margin businesses such as chemical cellulose, a move analysts say is finally showing results.
"They have improved the quality of the business. They may finally be getting the story right, but it may take a while for it to fully come through into the bottom line," said Mohamed Kharva, an analyst at Nedbank Securities.
"The greatest concern is the Chinese and how much capacity they have added and how that will impact on the business in coming months."
Should market conditions remain stable, Sappi, the world's largest maker of fine paper used in glossy magazines such as Vogue, said it expected core profit for the second quarter to improve from the first quarter.
Shares in the company rose 1.69 percent to 27 rand by 0810 GMT, outperforming a 0.63 percent rise in the JSE All-share index. The stock is up nearly 12 percent so far this year.
Chief Executive Ralph Boettger said no more mills needed to be closed for the time being, although Sappi and other producers may need to reduce paper capacity in the future.
"Sappi at this point in time is pretty competitive and it's not us that need to take the next step," he said.
European forest companies are expected to report weak fourth-quarter profits due to falling demand for graphic paper, showing they still need to close more mills and seek M&A deals in 2012 even after last year's consolidation.
Finnish paper maker UPM-Kymmene said last week it would sell its paper packaging business to improve profitability after reporting a 30 percent drop in profit for October-December.
PRICE INCREASES
Boettger said prices for pulp may start increasing over the next few months and increases for other paper products may be likely later in the year.
Sappi will focus on getting its units running smoothly and profitably and bringing down its debt before making any more investments, beyond the planned expansion of its chemical cellulose businesses.
Headline earnings per share totalled 8 U.S. cents for the three months to end-December, compared with 7 U.S. cents a year earlier, the company said.
Headline earnings are the main profit gauge in South Africa and exclude certain one-off and non trading items.
Sales for the quarter fell to $1.59 billion from $1.87 billion the previous year.
Sappi expects the performance of its European and North American businesses to improve in the course of the year.
It also said demand for its chemical cellulose, made from wood and used in clothing, plastics, food and pharmaceutical products, remained relatively strong.
