ii view: Mondi profits roll further ahead

Selling its Russian operations and sat on an estimated dividend yield of over 4.5%. We assess prospects.

Third-quarter trading update to 30 September

• Adjusted profit (EBITDA) up 55% to €450 million

Chief executive Andrew King said: 

“Mondi delivered strongly in the third quarter. We remain focused on operational efficiency and cost control. Our ambitious expansionary capital investment programme is progressing well, as we continue to invest in our cost advantaged asset base to capture opportunities in our structurally growing packaging markets, enhance our competitiveness and deliver sustainably into the future.”

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ii round-up:

Paper and packaging maker Mondi (LSE:MNDI) today summarised recent trading as ‘strong’ with higher selling prices and volume growth helping to offset significant cost pressures.

Adjusted profit (EBITDA) for the third quarter to the end of September rose 55% to €450 million versus a year ago. That leaves Mondi on track to comfortably meet or even beat City expectations for second half profit of around €820 million. 

Mondi shares rose by around 2% in UK trading, leaving them down by close to a quarter year-to-date. Smaller rival Cropper (James) (LSE:CRPR) is down by a similar amount, while FTSE 100 rivals Smurfit Kappa Group (LSE:SKG) and Smith (DS) (LSE:SMDS) are both down by around a third in 2022. 

The FTSE All-World index is has fallen by around a quarter year-to-date as investors fear a potential global recession given rising interest rates needed to tame runaway inflation. 

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Mondi, which was separated out of mining giant Anglo American (LSE:AAL) in 2007, continues to pursue a €1 billion pipeline of expansionary capital projects. This now includes a recent Italian mill acquisition and planned upgrading of plant for an expected €240 million, plus the €400 million installation of new machinery at its flagship Steti, Czech Republic facility to raise efficiency. 

Its Russian operation is being sold following the Ukraine conflict and has been classified as discontinued in this latest update. 

Broker Morgan Stanley reiterated its ‘overweigh’ stance on the shares following the trading update, with an estimated fair value price target of 1,800p per share. 

ii view:

Mondi is an integrated paper and packaging company with operations stretching from forests and producing pulp to making sustainable consumer and industrial packaging, using paper where possible and plastic when not. 

During its 2021 financial year, flexible largely plastics-based packaging generated its biggest slice of sales at just over a third; followed closely by corrugated or largely paper-based packaging at a third; uncoated fine office paper at a further fifth and engineered materials the balance.  

For investors, a highly uncertain economic outlook, including rising interest rates and a cost-of-living crisis, may see demand crimped. Rising input costs such as energy for manufacturing and transport warrant consideration, while product price rises are likely to meet increasing customer resistance. 

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More favourably, its combined plastics and paper businesses potentially offer an opportunity, as customers continue to grapple with the environmental pros and cons of each, or a combination of the two. Generation of its own energy from biomass sources has helped to keep costs down, while its focus on increasing productivity, often via the latest machinery, continues.

On balance, and given both an estimated future dividend of over 4.5% and ongoing exposure to themes of environmental sustainability and ecommerce, scope for longer term optimism looks to persist. 

Positives: 

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

Negatives:

• Selling low-cost Russian operations
• Exposure to currency movements

The average rating of stock market analysts:

Buy