Lingerie Pulp Exciting Sappi Bond Investors: South Africa Credit

Sappi Ltd. (SAP), the world’s biggest maker
of dissolving wood pulp, is luring investors with its push into
lingerie as bond yields fall to a record.

Yields on the Johannesburg-based company’s note due April
2018 fell 158 basis points since Oct. 1, the start of its fiscal
year, to an all time low of 4.505 percent yesterday, according
to data compiled by Bloomberg. That compares with a 78 basis-point decline in the average yield for emerging-market pulp and
paper companies in JPMorgan Chase Co. indexes.

Eucalyptus tree cellulose for clothes sold by companies
including L Brands Inc.-owned lingerie maker Victoria’s Secret
and Inditex SA’s Zara is delivering profit margins of about 33
percent for Sappi, compared with 7 percent for its bigger paper
unit, according to the company. Sappi is focusing on wood pulp
as paper consumers switch from newspapers and magazines to
digital publications.

“Sappi’s commitment to reduce debt and the efforts to
generate cash are seen as positive by investors,” Thomas Korhammer, a fund manager at Raiffeisen Capital Management, said
in an e-mailed response to questions on May 14. The company,
based in Vienna, has about 28 billion euros ($38 billion) of
assets under management, including Sappi bonds.

Eucalyptus tree cellulose for clothes sold by companies including L Brands Inc.-owned lingerie maker Victoria’s Secret and Inditex SA’s Zara is delivering profit margins of about 33 percent for Sappi, compared with 7 percent for its bigger paper unit, according to the company. Close

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Photographer: Scott Eells/Bloomberg

Eucalyptus tree cellulose for clothes sold by companies including L Brands Inc.-owned lingerie maker Victoria’s Secret and Inditex SA’s Zara is delivering profit margins of about 33 percent for Sappi, compared with 7 percent for its bigger paper unit, according to the company.

Boosts Cash

Sappi’s net debt will probably decline 11 percent to $2
billion by the end of September from March as its strategy to
expand in dissolving wood pulp boosts cash generation, Chief
Executive Officer Ralph Boettger said by phone from Johannesburg
on May 12. Net income surged to $32 million from $2 million in
the three months through March, with pulp accounting for 75
percent of operating profit.

Lower debt costs would allow the company to pay a dividend
for the first time since September 2008, Boettger said in
January. The CEO will retire from the company next month, to be
replaced by Steve Binnie, the chief financial officer.

“The drop in the yields reflects, we believe, the good
performance of the company as it makes our bonds more attractive
and increases their demand,” Boettger said in an e-mail on May
12. “This also means that it will be easier to issue further
bonds, if we wish to do so, and it would be at a lower cost.”

‘Good Move’

Sappi is targeting production of 1.3 million metric tons of
dissolving wood pulp in the 12 months through September, a 60
percent increase from a year earlier, giving the company a
global market share of about 20 percent. It has invested $500
million converting mills in the U.S. and South Africa to boost
output.

“Diversifying away from coated paper to dissolving wood
pulp is a good move,” Sean Ungerer, a Johannesburg-based
analyst at Avior Research (Pty) Ltd., said in e-mailed comments
yesterday. “Demand dynamics remain robust, with attractive
margins for Sappi due to its low cost base and optionality of
supplying from South Africa and North America.”

Sappi shares gained 11 percent this year, valuing the
company at 19 billion rand ($1.8 billion), outperforming the 6.3
percent increase on the FTSE/JSE Africa All Shares Index. (JALSH)

The company stands to benefit from a weaker rand as it
exports pulp to other markets, according to a presentation on
its website. The currency of Africa’s second-biggest economy,
which has strengthened 1.5 percent against the dollar this year,
dropped 19 percent in 2013. It traded 0.4 percent stronger at
10.3615 per dollar as of 3:08 p.m. in Johannesburg.

“We see Sappi as a solid credit,” Raiffeisen’s Korhammer
said. “The company has adequate liquidity and should manage to
reduce” debt, he said.

To contact the reporter on this story:
Kamlesh Bhuckory in Johannesburg at
kbhuckory@bloomberg.net

To contact the editors responsible for this story:
Daniel Tilles at
dtilles@bloomberg.net
John Bowker, Gordon Bell

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