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.

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. 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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