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Sappi – Q4/FY 2010-11 earnings review

Sappi released Q4 and full year earnings yesterday, which were in line with its revised guidance provided in October. Full year revenues were up 11% at USD 7.28 bn driven exclusively by better pricing terms. Margins however, remained under pressure as higher raw material costs prevailed. Particularly in Q4, a 6% overall volume decline offset favorable pricing and forex gains, leading to a marginal 0.7% y-o-y increase in revenues.

The North American paper and the South African chemical cellulose businesses however, continued to perform well. EBITDA was 19% lower y-o-y for the quarter, but was 9% higher for the full year. Raw material costs remained elevated for most part of the year, with some visible signs of moderation only in the latter part of Q4. Cashflow generation was good, supported by a significant working capital release. Net leverage was 2.6x.

The outlook for 2011/12 is mixed, with both North American paper as well as chemical cellulose expected to perform generally well. Following the restructuring in the European and South African paper businesses, some cost savings should be expected which would positively impact earnings, despite a general market weakness. Given the investments announced in chemical cellulose, capex commitments are high in the coming year.

However, following the significant refinancing executed in 2010/11 and its comfortable leverage, many commentators believe that Sappi can afford to target growth projects presently.