Johannesburg, 13 June 2017 — Global Credit Ratings has today upgraded the national scale Issuer ratings assigned to Sappi Southern Africa Limited to A+(ZA) and A1+(ZA) in the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Sappi Southern Africa Limited (“SSA”) based on the following key criteria:
Sappi Limited (“Sappi”) is one of the leading global players in the paper and pulp industry. Whilst operations are still concentrated in the paper segment, which remains in structural decline, Sappi has protected volumes by ensuring it is amongst the lowest cost producers. In addition, its broad presence across various segments has allowed a shift in production to faster growing, more profitable, markets. In Europe, demand for speciality papers has risen strongly, with substantial capex to be spent on this segment over the medium term. In Southern Africa, much of the SSA capacity has been converted to produce dissolving wood pulp (“DWP”), with Sappi now the leading global producer of DWP, having production capacity greater than the next two largest producers. DWP provides important product diversification as its demand is unrelated to paper and continues to grow at 3-5% annually.
SSA has strong market positions in several domestic paper segments. While these businesses have also seen demand decline, SSA has maintained business volumes due to efficiencies and price competitiveness, increasing market share at the expense of competitors. To this end, SSA’s extensive forestry assets provide a competitive advantage in terms of access to raw materials and quality control. However, the major driver of earnings growth has been the conversion of domestic capacity to produce DWP. As pricing is all USD denominated, sales provide a strong Rand hedge for SSA; and while DWP now accounts for around half of group EBITDA, it contributed a much larger proportion of SSA’s EBITDA.
Accordingly, SSA has reported very strong revenue and earnings growth over the review period, with operating profit, of R4.8bn in FY16, almost 7x higher than in FY12, and NPBT reporting a 10-fold increase over FY13. Although profitability was bolstered by the weakness in the ZAR in FY16, the results still reflected the sustainable improvement in core earnings over the review period. Cash flows have been similarly robust, with cash flow from operations rising to R3.3bn in FY16 (from R1.3bn in FY13). The strong cash flows have been sufficient to comfortably meet all capex costs since FY14, whilst excess cash has been available to redeem debt and make inter-group transfers. SSA is planning to increase capex in FY17 and FY18, which should be internally funded.
SSA has swung from a net debt position of almost R3bn at FY13 to a net cash position of over R2bn at FY16, with gross debt at a review period low of R1,645m. Funding strength is supported by R1.3bn in unutilised credit facilities at 1H FY17, provided by the large local banks. Sappi Limited has also reported a steady decline in gearing metrics, which are now well within covenant limits. Thus, funding and liquidity risks for both Sappi and SSA are considered low.
Positive rating action is dependent on sustained growth in earnings and cash flows over the longer-term, demonstrating the benefits of the more specialised business lines through the cycle. Conversely, further contractions in key market segments, or a decline in demand for DWP, could leading to lower volumes and necessitate further restructuring or a renewed increase in debt.
|NATIONAL SCALE RATINGS HISTORY|
|Initial (November 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (August 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2017
Sappi Southern Africa Limited Issuer rating report, 2015-2016
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Sappi Southern Africa Limited participated in the rating process via face-to-face management meetings, teleconferences as well as written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Sappi Southern Africa Limited with no contestation of the ratings.
The information received from Sappi Southern Africa Limited and other reliable third parties to accord the credit ratings included:
- audited financial results for Sappi Limited for 30/09/2016, and five years comparative financial statements;
- audited financial results for Sappi Southern Africa Limited for 30/09/2016, and five years comparative financial statements;
- reviewed results for six months to 31/03/2017 for Sappi Limited
- quarterly results presentations (2012-2017);
- details of funding facilities;
- financial projections for Sappi South Africa to 2022;
- corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR upgrades Sappi Southern Africa Limited’s rating to A+(ZA); Outlook Stable.