November 15, 2018 / 10:58 AM / a month ago

UPDATE 1-South Africa's Sappi takes short term pain for long term gain

* Sappi is revamping plants, capex increases

* Investments disrupt production

* Plants will be able to produce more profitable products

* Group CEO satisfied with result considering stoppages

* (Recasts lead, adds CEO, dividend, analyst comment)

By Patricia Aruo

JOHANNESBURG, Nov 15 (Reuters) - South African paper and pulp maker Sappi said on Thursday that its profit for the full year fell 4.4 percent as it ramped up investment to modernise plants and shift production to more profitable products.

The Johannesburg-based company, whose European and North American operations contribute 51 percent and 25 percent of Sappi’s sales respectively, said profit fell to $323 million from $338 million.

The company said projects in its European and North American paper facilities as well as the revamping of some South African pulp plants increased capital expenditure.

The investment is part of a “further shift in the product mix of the group away from the traditional graphic paper business towards higher margin and growth,” Sappi said in a statement.

Capital expenditure was $146 million dollars, the bulk of which was contributed by projects undertaken at the Ngodwana and Saiccor pulp mills in South Africa.

“We are feeling pretty satisfied despite the fact that we have come in flat despite all of those production stoppages,” Group Chief Executive Stephen Binnie said in an interview.

Earnings before interest, tax, depreciation and amortization, which excludes special items, fell to $762 million from $785 million in 2017.

Fourth quarter profit was up 4.9 percent while annual sales rose to $5.8 million.

A final dividend of $17 cents was declared.

Sappi’s shares were 0.11 percent firmer at 81.14 rand ($5.68) by 1050 GMT.

“The results were largely in line with expectations with the operational challenges in the early part of the year negatively weighing on some of the performance in the fourth quarter,” said Wade Napier, investment analyst at Avior Capital Markets.

Sappi said its profits also came under pressure from the firmer rand during the first half of the 2018 calendar year but it expects a shift should current dollar strength persist.

“Nearly all the product from our South African business is exported so a stronger currency effectively reduces our profit. Now that the rand is weaker than it has been for much of the previous financial year, we feel a little better going forward,” said Binnie.

Napier believes improved local profits should be sufficient to offset the decline Sappi expects in its European market as a result of a projected economic slow down. ($1 = 14.2845 rand) (Reporting by Patricia Aruo; editing by Elaine Hardcastle)

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