WHY SANLAM LIKES MONDI
Mondi is a leading packaging and paper producer that has operations focused on Europe, as well as exposure to Russia, South Africa and North America. Mondi benefits from highquality, low- cost assets, vertical integration into paper pulp and from energy-generating capacity.
WHAT WE LIKE
Mondi has i nvested capital and rationalised its business in recent ye ar s . Th e gr o u p ha s be e n successful in shifting its geographical and product mix. Increasing exposure to emerging market s an d co n s u mers , a s opposed to industrial packaging, has resulted in improving margins and returns. These positive trends have been despite a relatively adverse macro- environment and position the group well for any meaningful improvement, particularly in Europe.
Capital allocation has been a key success of the group. Over the past t wo years, Mondi has i nvested € 350m (R4.6bn) in projects with returns in excess of 40%. A large portion of these projects has been f ocused on cost optimisation. Further, spend of €420m (R5.5bn) over the following two years i s expected to yield returns in excess of 20%. The acquisition of Nordenia in 2012 has been slower to deliver on expected returns given a weak global consumer, however, this business does appear to be turning a corner and provides a good base for Mondi to deliver high-value, specialised consumer packaging products.
RISKS TO OUR VIEW
While Mondi ’ s key grades are relatively well balanced from a supply and demand perspective, challenges in the graphic paper markets could see competitors convert c apacit y t o produce packaging i n the medium term. That said, if these conversions were to take place they would take some time to deliver (two to three years from announcement) and Mondi will retain its low-cost position.
In the short term, exposure to Russia could negatively i mpact Mondi if demand i n that region declines, although this is to a certain extent mitigated by ruble weakness.
THE BOTTOM LINE
While the stock has performed well, up around 32% since the start of the year, we believe that highquality management, allocation of capital into high- return projects and growth from a solid base of operations positions the group well.