Craig Martin: Mondi should head above R200 in the near term!

By Craig Martin*

Craig Martin
Craig Martin

Paper and packaging is not particularly cutting edge, in fact, some might argue that Mondi Plc (MNP) or Mondi Ltd (MND) operates rather successfully in an industry that is considered to be in decline. However, when you do invest in such a “boring” sector, you really want to find the best company that operates in that space. Mondi is arguably still one of the lowest cost producers in the areas of packaging that it operates in, which allows it generate far better returns than most of its global competitors.

I think Mondi has the characteristics of a company that you should hold in a long-term portfolio and evidently, I am not alone in my analysis. Credit Suisse has an “overweight” recommendation on Mondi for some time and this week commended that “it is one of their top picks in the sector.” They currently have target price of $20.35 on the stock, which implies a share price of around 22161cps. That infers at least 24% potential upside from the company’s current price at the time of writing, which was 17839cps.

This target price is in line with the notes and “buy” recommendations that came out last Friday (24th October) from both Liberum Capital and Jefferies Group who placed a price target of R21.32 on the group. Analysts at Deutsche Bank also reiterated a “buy” rating on Mondi Plc (MNP) in a research note on Friday, October 17th, with a more conservative price target of $20.27 on the share.

As further confirmation of the renewed confidence in the group, a SENS announcement yesterday (30th October) informed us that credit rating agency, Moody’s has upgraded the Group’s credit rating to Baa2 from Baa3. Which as the company CFO, Andrew King, stated; “is further testament to the robustness of the Group’s business model and its ability to generate strong cash flows through the business cycle.”

Mondi is not primarily involved in glossy paper, which is effected by an oversupplied market and reducing demand from publishers, rather it is more exposed to the packaging market. The key operations are located in Central Europe, Russia and South Africa, but the company has also made head roads into the Asia Pacific region, including China, where it has a consumer packaging plant in Taicang, in Jiangsu province. Mondi also has the first industrial bags plant in Iraq which supplies to cement manufacturers.

True, there is some uncertainty in Europe, and the consumer is expected to be under pressure in many Central Europe countries, in South African and even Russia China is also slowing-down, so why would we all recommend a company that relies on global economic growth and consumption?

We have heard all of these concerns raised before; in fact, I would hasten to say that practically every few months since 2008 macro-economic uncertainty has been the topic of discussion. Somehow the financial and economic world has managed to cope and I presume that the EU will simply throw money at the problem with some quantitative easing and the patient will be just fine for a little while longer.

Going into the financial crisis in 2008, the company was at the start of a three-year €850 million investment programme in two growth projects in Poland and Russia. Over the past seven years the company has spent €3 billion on capex and M&A. However, this capital expenditure, including past investments in China and Iraq (although small investments) are now all sunk and the company is demonstrating its ability to deliver great returns on capital employed (around 16%) above its average cost of capital.

The recent price increases in a number of the Packaging Paper grades, most notably on kraft liner and test liner should mean a nice lift to earnings. These increases were up around 35% per August and September this year and assuming that demand remains constant, this could equate to a nice 45-50% lift in EPS.

The concerns are arguably the macroeconomic developments in Europe and exposure to Russia, which is more than 10% of both production and turnover. However, Mondi is on a rating of 13.5 times 2014 earnings, with a 2,7% historic dividend yield. The likelihood of either a special dividend or share buybacks is extremely high. Cash generation is fantastic and we are looking for a great kicker in earnings from the recent price increases.

The management team have always been very cost conscious and aware of being ahead of the curve in terms of productivity improvements. Audited results for the year ending 31 December 2014 will be published on or around 24 February 2015, and I do think that the last half of the year will surprise many which I think could easily push Mondi comfortably above R200 a share. In my view this is a compelling buy.

* Craig Martin is an entrepreneur with investments in information technology and financial services. He has experience as a discretionary Portfolio Manager, and has worked for ABN-Amro, Aurica Asset Management and Guardbank in the past. He currently investments for his own account and operates as an independent equity analyst. 

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