[TOP STORY] A look at Mondi, now clear of its Russian business

SIMON BROWN: I’m chatting now with Sameer Singh, a research analyst at [Old Mutual Wealth] Private Client [Securities]. We’re talking [about] Mondi. Sameer, I appreciate your early morning time. The Mondi [share price] chart – you can see the giant collapse. Of course, it was back in February when Russia invaded Ukraine. That was because they had about 12% of assets and around 20% of earnings coming out Russia. But they have now exited that, and are sort of clear of Russia in its entirety.

SAMEER SINGH: Good morning, Simon, and thank you so much for the time. Yes, I think Mondi’s journey to this point has been quite interesting, and the market environment has been very challenging for them. Of course, no one could have foreseen what was about to happen with Russia and the Ukraine, and they were really caught in the headlights. Of course that share price reflected that move, along with many other companies exposed to the region.

SIMON BROWN: They absolutely were. And the chart – pretty much trading at five-year lows. That said, they’ve now exited the Russian business. They got a pile of cash for that, and we’ll get back to the cash in a moment.

The rest of the business, paper and packaging, is doing quite well. It is a very sound and, frankly, very profitable operation.

SAMEER SINGH: One hundred percent. I couldn’t have put it better. In fact, that business model is quite defensive if you think about the products that Mondi [has sold] into the market [for] many, many years. We mustn’t forget that this is a business that’s been operating since the 1960s, and we know that late in the early 2000s they spun out of Anglo American.

They have much experience in operating in very difficult geographies. Post the collapse of the Soviet Union, they went quite aggressively into a lot of call it ‘the Wild East’ post the opening of those markets, and they secured themselves some good assets. Now, those assets, of course, are providing them with a good platform to service their main market, which is Europe. And in their most recent half-year results, despite the challenging economic environment, we’re finding still continuing demand, sustained demand, for e-commerce deliverables, also sustainable packaging.

I think we notice it most evidently when we’re buying our Woolies bags, which have shifted from plastic to cloth.

But also if we think about every Checkers Sixty60 delivery, and Pick n Pay’s ASAP deliveries, these are all in paper bags. This is a big part of Mondi’s business, speaking to the sustainability trend.

So with the most recent results earning about 65% in a very challenging inflationary environment, I think that its good results – and not only that, profit margins were up. They managed their growth margin level incredibly well [which is] really a good testament to management’s execution and their strategy. And then of course the operating profit line is also quite good. I think the market has largely been missing that. You mentioned that point; at a five-year low it’s quite shocking to think that this is where they’re trading, considering that the their markets have actually grown in size.

SIMON BROWN: Yes. Those results, as you point out, were a really, really a strong set of results. Part of that is – and you make the point in the note that you put out – the vertical integration of their supply chain. They’ve more control over their input costs, and importantly they were able to put through price increases at the same time.

SAMEER SINGH: Yes. Management has been very proactive, understanding that in an inflationary environment this is a time – if you are ideally positioned in your supply chain – to actually pass on these costs to clients. And Mondi, having a history of working very closely with their client base, creating these bespoke products, is speaking directly to a market that’s growing for them … packaging; they are making these bespoke packaging products for their clients, very large European clients. And that means that during difficult times they’re able to negotiate and pass through these costs, and these are coming through in terms of their profitability level.

Talking about the control of the supply chain, Mondi owns forests as well as the mills that process the wood from these forests. And then they also own the converting/packaging/manufacturing facilities which combine paper and sometimes plastic when necessary, to make a more resilient and sustainable product. I think that’s really stood them in good stead through this period.

SIMON BROWN: It absolutely has. And they’re a strong generator of cash. They always have [had] strong cash flows. They’re on around a 4% dividend yield. Heck, they’re on a historic PE of around seven-and-some-change at the moment.

But with the proceeds from the Russian sale, which was €1.5 billion if memory serves, could we see a special dividend, or do you think they would need the money internally?

SAMEER SINGH: It’s very possible. As you mentioned, they’ve been very a good cash generator over time. And their balance sheet is in a very strong position, regardless of the sale of the Russian assets. They are bound to receive about €1.5 billion. Chances are, more likely than not, that this is going to come through as a special dividend to investors. So I think this is quite a nice bonus.

Unfortunately, with the situation being as fluid as it is and uncertain, we cannot say when this will take place, but management have guided to the deal being concluded by the end of this year. In addition to that, that Russian business is also sitting with a bit of cash on the balance sheet and that cash is actually not part of the sale deal, so that cash will in time be sent back to Mondi.

They haven’t indicated a dividend, but it certainly will be put into the business for future growth.

On that, they’re sitting with quite a bit of cash. They also did a portfolio-rationalisation exercise earlier this year, selling a personal care components business to a Japanese company. That’s given them a bit of fire power to actually make up [for] this lost asset in Russia.

And probably over the next two years they’ll be growing their output by 11% off a €1 billion investment in Europe.

I think [these are] positive signs. They’ve a growing market, they’ve got growing output from the business, and I think one has to make a shout out to management who I believe are some of the best operators on the continent, if not globally. You are looking at a company like Mondi, which is up against like international paper companies which is almost double their size, yet they’re managing return on equity and margins that are close to one-and-a-half, two times those values.

SIMON BROWN: It is a key point. There is really good quality management at Mondi as well. And running those numbers they’re going to have a pile of cash on that their sheet. We’ll see what they do with it.

Sameer Singh, research analyst, we appreciate the early morning time.

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