ii view: Softer demand unsettles Mondi shares

Paper and packaging group Mondi battles weaker pricing with cost savings and growth initiatives.

Third-quarter trading to 30 September 2019

• Adjusted profit down 18% to €383 million
• Impact of planned full-year mill maintenance shutdowns up 26% to €150 million 

ii round-up:

Packaging and paper company Mondi (LSE:MNDI) reported generally softer demand across its markets, largely in line with its half-year expectations. 

Prices for key paper grades were below those seen during the first half period and as such adjusted profit is expected to be down 18% year-over-year and down 9% on the second quarter.

The share price fell over 3% in early stock market trading. 

Reduced like-for-like sales volumes for industrial bags and uncoated fine paper were partly offset by growth in corrugated packaging. 

Planned mill maintenance shutdowns during the quarter had an estimated impact on underlying profits of around €40 million, up from €30 million in Q3 2018. Costs were on average higher than in Q3 2018, although lower than the previous quarter.

Looking ahead, fourth-quarter prices had to date proved marginally below those of the third quarter.

If sustained, the impact of this lower pricing is expected to be largely offset by an easing of pressure on the cost base, supported by management’s ongoing profit improvement initiatives.

ii view:

Mondi is attempting to simplify itself. The group, which employs around 26,000 employees in operations across more than 30 countries, recently changed from a dual-listed structure into a single holding company structure. 

Along with an existing investment programme and cost saving initiatives, it is also reorganising itself into the four business units of corrugated packaging, flexible packaging, engineered materials and uncoated fine paper. The idea is to closer align with its customers. 

For investors, a forward price/earnings (PE) ratio below the three and 10-year averages offers appeal.  A prospective dividend yield of around 4.5% and covered more than twice by earnings injects additional enticement, although deteriorating management outlook comments clearly provide some basis for caution. 

Positives: 

• European market leader in virgin containerboard and uncoated fine paper
• Simplifying dual listed South African and UK structure into a single holding company
• Cost saving initiatives ongoing

Negatives:

• Price movements, outside of its control, in containerboard prices can hinder performance
• European markets generate around half of its revenues, leaving it exposed to economic fortunes
• Management outlook comments pointed to weaker product pricing 

The average rating of stock market analysts:

Buy