Interactive Investor

ii view: Mondi profit rises with Russian ops now up for sale

5th May 2022 15:45

Keith Bowman from interactive investor

Shares for this paper and packaging maker are down over 10% in 2022 and sit on an estimated future dividend yield of around 4%. Buy, sell, or hold?

First-quarter results to 31 March

  • Adjusted profit (EBITDA) up 63% to €574 million

ii round-up:

Paper and packaging maker Mondi (LSE:MNDI) flagged good demand for its products during the first three months of 2022, with higher average selling prices more than offsetting ongoing cost pressures. 

Adjusted profit (EBITDA) rose by 63% compared to the year ago quarter to €574 million. Profit on the same basis and excluding its Russian business, now up for sale, climbed around 70% to €460 million, easily beating City forecasts for under €400 million.

Mondi shares rose by more than 7% in UK trading, leaving them down by around 12% year-to-date. Shares for rivals Smurfit Kappa (LSE:SKG) and Smith (DS) (LSE:SMDS) are down by similar amounts, as is the FTSE All-World index. 

Accompanying Mondi comments pointed towards a €1 billion pipeline of expansionary capital projects underway, which are expected to generate mid-teen returns when in full operation.

Management also stressed the operational and structural complexity of trying to sell its Russian assets against a backdrop of an evolving political and regulatory environment.

Its Russian business had a net asset value of €687 million as of 31 December. In 2021, Russia accounted for 12% of overall sales and over the last three years had generated around a fifth of Mondi's underlying EBITDA. Most of its production goes to domestic customers. 

Operating in Russia for over 20 years, Mondi's other low-cost places of production include Eastern Europe and South Africa. 

First-half results are scheduled for 4 August. 

ii view:

Paper and flexible plastic-based packaging maker Mondi was separated out of miner Anglo American in 2007. During its 2021 financial year, flexible largely plastics-based packaging generated its biggest slice of sales at around 36%, followed by corrugated or largely paper based packaging at 32%. Uncoated fine office paper makes up a further 21%, with engineered materials the balance.  

For investors, rising input costs such as energy for manufacturing and transport cannot be ignored. The sale of its Russian business employing over 5,000 people is also not likely to be straightforward given the souring of relations between Russia and the West. 

That said, its combined plastics and paper businesses potentially offer an opportunity, as customers grapple with the environmental pros and cons of each or a combination of the two. Demand for ecommerce and related packaging also looks set to rise long term, while a future forecast dividend yield of over 4% is not to be overlooked in a still low if rising interest rate environment. On balance, and while some caution looks sensible given its up for sale Russian operations, ongoing exposure to both environmental and ecommerce themes appear to inject scope for long term optimism. 

Positives: 

  • Exposure to ecommerce and sustainability trends
  • Attractive dividend (not guaranteed)

Negatives:

  • Up for sale Russian business
  • Exposure to currency movements

The average rating of stock market analysts:

Buy

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