No cracks to paper over
As awareness of plastic waste grows, the packaging group is set to cash in with eco-friendly alternatives
Over the past decade, Mondi’s strategic focus has been on building capacity, driving efficiency and making well-executed acquisitions. The strategy is paying off for the €7.5bn annual revenue paper packaging group.
Mondi showed its form in its half-year to June, roaring in with pretax profit up 29% at €590m, and EPS up 26%.
“It was a phenomenal performance,” says Ricco Friedrich of Denker Capital. “There is little you can fault [the company] on.”
Mondi’s profitability also continued to improve in the half-year. Reflecting this, return on capital, at a solid 21.3%, was up from 18.5% in the previous half-year. This figure was just 7.6% at the time of Mondi’s unbundling by Anglo American in 2007.
Rising returns on capital enabled Mondi to buck the negative market conditions that prevailed until very recently. The group’s operating profit grew 8% a year and dividends 15% a year between 2013 and 2017.
A long-awaited economic upturn in Europe, a region crucial to Mondi’s performance, is also working in its favour. In the past half-year, the company generated 71% of its revenue in
Europe — 39% in Western Europe, 23% in emerging Europe and 9% in Russia.
The outlook remains fair. The European Commission reports that consumer confidence in the EU has rebounded over the past 18 months to its highest level since 2007.
The bright picture in Europe is matched in the US — the world’s biggest consumer market — where the American Forest & Paper Association reports robust packaging demand growth.
Fast-rising demand for packaging has swung the market from a position of excess capacity, which prevailed for years, to
Mondi
one of tight supply, giving pricing power back to producers.
“Prices are rising across all our key product segments,” Mondi CFO Andrew King told analysts at a results presentation.
Significant price increases put through by the company in its past half-year included 24% on brown kraftliner, 11% on fluting (the middle liner of corrugated cardboard) and 8% on white kraftliner. More price increases are set to kick in during the second half.
Price increases were key drivers of Mondi’s profit growth in its past half-year, adding €338m to earnings before interest, taxes, depreciation and amortisation, which came in at €852m.
At the results presentation, CEO Peter
Oswald painted an upbeat picture of prospects. “The second half of the current year has started well for us,” he said. “There is more to come in 2019 when our big capital expenditure projects start coming on stream.”
In the current year and 2019, Mondi’s targeted annual capex spending of €700m€800m will add 9% to its wood pulp and paper output. The current capex programme builds on capex totalling €2.6bn in the previous five years.
“Our capex is focused on assets that will provide us with a cost advantage and generate good returns through the cycle,” said Oswald.
It is an approach Mondi has long mastered. “[The company’s] allocation of capital has been superb,” says Daniel Isaacs of 36One Asset Management.
Through its investment strategy, Mondi has grown to become one of the world’s top 10 paper packaging companies. This places it in a strong position to benefit from what has the makings of a radical change in the packaging industry: a shift from plastics to more ecofriendly paper alternatives.
“Since the start of 2018 there has been an unprecedented surge in public interest in plastics waste,” said Oswald. “Mondi is uniquely positioned to benefit. We have the technology needed and a deep understanding of the needs of FMCG [fast-moving consumer goods] companies.”
Oswald highlighted shopping bags as an area on which Mondi is focusing. With only 10% of shopping bags currently made from paper, there is huge scope for change.
According to an estimate by the Wall Street Journal, between 500 billion and one trillion shopping bags are used in the world each year.
“It’s intuitive that Mondi as the number one global supplier of kraft paper and industrial bags should benefit hugely from the commitment of many FMCG companies and retailers to reduce their use of plastics packaging,” said Oswald.
He added that Mondi is developing innovative paper packaging solutions, which it is marketing under its recently launched global brand, Shoppingworld by Mondi.
The market has reacted favourably, ramping up Mondi’s share price to a new high, taking its total rise in rand over five years to 160%. It makes for a good news story that appears far from over.