This paper-and-cardboard giant still looks an attractive package amid shift to digital shopping

Reports from industry rivals are expected to confirm that demand has not weakened

Our initial look at Mondi, the paper and packaging giant, four months ago is off to a decent start: we have a mid-teens percentage capital gain and now the prospect of a bumper dividend funded by the disposal of the FTSE 100 company’s Russian business, Syktyvkar.

Meanwhile, price increases from leading US paper and packaging companies lend some credibility to the argument that the cycle is bottoming, thanks to an end to a lengthy destocking process and production downtime (and even closures) at some industry participants.

As a result, the shares could have further to run. Mondi announced the sale of Syktyvkar in September for 80bn roubles, or €800m (£690m) at the prevailing exchange rate. The deal went through in October and Mondi received the final instalment of the payment in December, to allay any fears about how easy it would be for the company to receive the money in view of Western sanctions against Russia.

Management then declared that the cash would be distributed to investors in the form of a special dividend, which would be accompanied by a share consolidation designed to maintain share price comparability once the payment was made. Shareholders will vote on this plan at a general meeting on Friday. Assuming that the vote passes, Mondi will pay the €1.60 special dividend, equivalent to 138p a share at the current exchange rate, to shareholders on the register at the market close on Jan 26. Investors in Britain will receive payment in sterling, although they have the option to take euros. The exchange rate used will be set on Feb 1 and final payment will be made on Feb 13, although investors have the option to reinvest the cash due as part of Mondi’s long-established dividend reinvestment plan.

The share consolidation, designed to mean that the share price comes out broadly unchanged following payment of the special dividend, all other things being equal, will apply to shareholders on the register as of the market close on Jan 26. Investors will receive 10 shares for every 11 held and the consolidation will become effective when trading begins on the London market on Jan 29.

After that, attention will switch to Mondi’s full-year results for 2023, which are due for release on Feb 22. The figures are unlikely to look particularly strong after a difficult year’s trading and the Russian disposal. On a statutory basis sales are expected to drop by just under a fifth to €7.4bn and pre-tax income by more than half to around €700m. The final ordinary dividend could also see a cut. However, of greater interest will be any outlook statement for 2024 from the chief executive, Andrew King, and the board. Analysts are currently forecasting a small increase in sales and a 10pc jump in pre-tax income.

But before then investors could get another steer on the wider industry’s fortunes. American rivals Packaging Corporation of America, International Paper and Westrock are due to report for the final quarter of 2023 on Jan 25, Jan 31 and Feb 2 respectively.

Their comments should be particularly illuminating, not least because International Paper is due to push through a round of price increases this month. Analysts will look for confirmation that these rises are sticking and that capacity utilisation is on the increase.

Risks do still abound, and this column notes with some concern the latest profit warning just before Christmas from Fedex, the courier company, which cited uncertain demand. If demand for shipments weakens, so too could demand for packaging. A further risk is that market expectations for interest rate cuts prove too optimistic and investors start to dial back their hopes for broader economic growth as a result. Cyclicals such as Mondi are starting the year on a notably weak footing.

However, even after last year’s rally from the summer, Mondi’s shares still trade some 25pc below their 2021 peak, when investors’ enthusiasm for anything related to online retail was still heady (thanks to the pandemic and lockdowns). As a result, Mondi’s £7.3bn market value compares with £5.3bn of net assets for a price-to-book ratio of barely 1.4, which does not look excessive for a business with a strong record of generating both cash and returns on capital employed in the mid-to-high teens.

In addition, the £1.1bn of net debt represents barely a fifth of net assets, so financial gearing is low and interest cover is good.

‘The £1.1bn of net debt represents barely a fifth of net assets, so financial gearing is low and interest cover is good’