Mondi PLC (LON: MNDI) – Maintaining a robust financial performance in a challenging environment.

Mondi PLC is a FTSE 100 listed Packaging and Paper Company. It employs around 26,000 people across over 30 countries. It is a leading containerboard producer with an integrated, well-invested, cost-advantaged asset base. It also provides a unique range of flexible packaging solutions to various industries, such as FMCG products, Food service and retail, Cement, Chemicals, among others. The Company also deals in consumer packaging, which manufactures and sells innovative flexible plastic-based consumer goods packaging solutions, technical films, components for personal care products, and release liners. It also has an extensive range of quality papers for use in offices and professional printing houses. Overall, the Company is a leading producer of paper and plastic solutions, and it is uniquely positioned to meet sustainable packaging requirements.

On 15 October 2020, the Company will release the trading update for Q3 FY20.

 (Source: Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

As per the Global Market Insights, the market size of the Global Packaging Materials industry was estimated around US$900 billion in 2016 and it is projected to reach US$1.3 trillion by 2024. The progressive growth in the food & beverage industry would propel the packaging materials demand. Moreover, the increasing consumption of alcoholic and non-alcoholic beverages would also be a growth enabler for the packaging market. Adjacently, the global household cleaners market value will exceed US$35 billion by 2024 (2016: US$25 billion) as the proliferation of the household products will drive the growth further for the packaging materials market. Meanwhile, rising consumer income will increase the demand for personal care products, which would further require packaging materials.

Growth Prospects and Risk Assessment

Mondi has a leading market position and has a well-located operation with access to cost-advantaged asset base and competitive fibre. The vertical integration helps in reducing exposure to price volatility and provides the security of supply and logistics optimisation. It has a disciplined capital allocation and robust financial position to operate the business flexibly. The Company has maintained the return on capital employed of over 19% since 2015 and realised a five-year total shareholder return of ~88%. Moreover, in FY19, the Company delivered an industry-leading underlying EBITDA margin of 22.8%, while the total recordable case rate improved by 22% against the 2015 baseline. The credit rating agencies, Standard & Poor and Moody’s have been maintaining a stable outlook on the Company with BBB+ and Baa1 ratings, respectively.

(Source: Presentation, Company Website)

However, the pervasive impact of a pandemic causes strategic, financial, operational and compliance risks. The fluctuations and variability in selling prices can impact the gross margins. Moreover, the changing climatic conditions, industry productive capacity, and availability of product substitutes could also pose strategic risks. The economic downturn and Brexit are imposing currency risk and tax risk. Furthermore, the cost and availability of raw materials, technical integrity of operating assets, and environmental impact can cause operational risks.

A Glimpse of Business Segments

(Source: Presentation, Company Website)

Key Recent Developments

1 September 2020: The Company completed the installation of new equipment at corrugated box production plant in Szczecin, Poland to mark further progress in digitalisation and meet growing e-commerce demand.

6 August 2020: The Board of Mondi declared a dividend of 29.75 euro cents per ordinary share for FY19, along with interim dividend of 19.00 euro cents per ordinary share. The total dividend of 48.75 euro cents per share will be paid on 29 September 2020.

Key Shareholders Statistics

Financial and Operational Highlights (for the six months ended 30 June 2020, as on 6 August 2020)

(Source: Company Website)

• The Company delivered a robust performance in H1 FY20 despite the significantly lower average selling prices across the key pulp and paper grades (due to COVID-19).
• The Company seems to be well-positioned for recovery with a resilient business model.
• Led by lower average selling prices across the key paper grades, the Group’s revenue was down by 8.46% year-on-year in H1 FY20. For H1 FY20, the underlying EBITDA decreased by 17% year-on-year, due to softer pricing amid the coronavirus pandemic.
• On 30 June 2020, the net debt decreased by €168 million to €2,039 million as compared with the previous period (31 December 2019: €2,207 million). While the net debt to 12-month trailing underlying EBITDA ratio stood at 1.4 times, which was well below the single bank debt covenant of 3.5 times.
• Mondi had extended the Syndicated Revolving Credit Facility to July 2022 with core bank group. Also, it had successfully issued 2.375% €750 million 8-year Eurobond.
• The Company witnessed a robust liquidity position, with €805 million of undrawn committed debt facilities and net cash of €606 million. In September 2020, Mondi is maturing the €500 million Eurobond. There were no other material short-term debt maturities.
• As a leading producer of both flexible plastic and paper-based packaging, the Company has a unique portfolio of sustainable packaging solutions, which will support the customers’ environmental goals.
• In 2020, the Company has reduced the capital investment, which will support to deliver growth and further strengthened liquidity. Recently, the Company has got a strong contribution from completed projects. Whilst key projects expected to increase current saleable pulp and paper production. It expects capital expenditure in the range of €600-€650 million in 2020 and similar levels in 2021.
• During COVID-19, the Company has shifted to online purchasing, which shows strong growth in e-commerce.
• In Corrugated packaging division, the Company has shown strong volume growth and cost control, with an increase in Corrugated Solutions volumes of 4% in H1 FY20 and robust demand in fast-moving consumer goods and e-commerce. In a flexible packing business, Mondi witnessed higher sales volumes across all segments.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Mondi Plc has delivered return on equity (ROE) of 8.6% which was higher as compared to the industry median of 1.5%.  On the liquidity front, the current ratio was higher than the industry median of 1.53, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging environment. On leverage front, the debt-equity ratio was 0.67x, which was slightly higher as compared to the industry median of 0.65x.

Share Price Performance Analysis

Daily Chart as on 7 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 7 September 2020 (before the market close, at 9:15 AM GMT+1), Mondi Plc shares were trading at GBX 1,450.00, up by 0.76% against the previous day closing price. Stock 52-week High was GBX 1,794.00 and Low of GBX 1,156.50, respectively. From the technical standpoint, 14-day RSI is currently supporting the upside move.

Mondi Plc Vs FTSE 100 Index (5 Years)

(Source: Refinitiv, Thomson Reuters)

In the last five years, Mondi Plc share price has delivered 3.24% return as compared to negative 3.64% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

To compare Mondi Plc with peers, Price/Earnings multiple has been used. The peers are BillerudKornas AB (publ) (Price/NTM Earnings was 24.65x), DS Smith Plc (Price/NTM Earnings was 10.41x), Smurfit Kappa Group Plc (Price/NTM Earnings was 13.00x), Stora Enso Oyj (Price/NTM Earnings was 19.00x), UPM-Kymmene Oyj (Price/NTM Earnings was 17.86x), Verallia SAS (Price/NTM Earnings was 17.94x), Westrock Co (Price/NTM Earnings was 13.18x) and Woodbois Ltd (Price/NTM Earnings was 11.23x). The Average of Price/NTM Earnings of the Company’s peers was 15.90x (approx.).

Business Outlook Scenario

In H2 FY20, the Company anticipates that heightened macro-economic uncertainties will remain and pricing across key pulp and paper grades will stay in line or below the average of H1 FY20. However, the demand for packaging daily essentials will remain robust, while the demand for industrial end-uses would continue to be weak. The order book uncoated fine paper has picked up from lows seen in Q2 FY20 and near-term recovery may not be expected.

The Company has a strong balance sheet and a prudent capital allocation to ensure resilient performance during a prolonged macro-economic downturn, while keeping itself well-positioned to outperform when the economic recovery finally starts. This is underpinned by the Company’s cost-advantaged asset base, portfolio of sustainable packaging solutions, culture of continuous improvement, and the strategic flexibility offered by a strong cash generation and financial position.

The Company has declared a dividend of 29.75 euro cents per share relating to FY19 period and 19 euro cents per share interim ordinary dividend declared for 2020. Looking ahead, the Company remains confident in the structural growth drivers in the packaging sectors while it is already advantageous of lower prices across our key paper grades.

 (Source: Presentation, Company Website) 

Over the period 2007 to 2019, the Company witnessed a CAGR of 5% in cash flow generation. Also, it has reported decent fundamental metrics as it has maintained an EBITDA margin above 20% for the last three years. The ROE recorded by the Company in the past three years was considerably above the peer’s average.

Considering the robust financial performance, strong cash generation, sound balance sheet, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Mondi at the current price of GBX 1,450.00 (as on 7 September 2020, before the market close at 9:15 AM GMT+1), with lower-double digit upside potential based on 15.90x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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