Mondi in the box seat

This year alone, Mondi has spent over €1.1bn (£931m) growing its stable, including €657m for German consumer packaging business Nordenia. But Mondi looks to be spending well. Annual sales have grown on average by 6 per cent for the past 14 years and adjusted cash profit by 13 per cent over the past three years. Analysts at investment bank UBS expect profit growth of 7 per cent this year and next, and 9 per cent in 2014.

Of course, much depends on big clients - supplying nappy fasteners and sanitary towel liners to Procter & Gamble made up over a third of Nordenia's revenue in 2011 - but Nordenia is set to become Europe's third-largest consumer packaging company. Making re-sealable bags for fast-moving consumer goods such as Tilda rice, Persil liquid and Friskies cat food tends to be resilient. In addition, Mondi chiefs expect savings of more than €15m a year by 2014.

Importantly, over 30 per cent of Nordenia's sales come from eastern Europe. That fits in nicely with Mondi's plans. Well over half of group revenues are already from developing economies; increasingly important, given the decline in western Europe's demand for office paper, which still makes up a quarter of Mondi's sales. And it helps that over two-thirds of Mondi's plant is in low-cost regions.

In addition, Mondi has just snapped up Duropack's operations in Germany and the Czech Republic for €120m in cash. That strengthens the corrugated packaging business - 24 per cent of sales in the first half - and, like Nordenia, will immediately boost earnings. That's a relief, as group underlying operating profit fell 24 per cent to €269m in the six months to June as lower prices offset higher volumes. Still, that was better than expected and the group says things have picked up since.

Factoring in the acquisitions, UBS has upgraded its EPS forecasts for next year by 8 per cent and by 11 per cent for both 2014 and 2015. Other City analysts are likely to follow suit and could upgrade following Mondi's next trading update due at the end of the month. Both prices and volumes improved in the second quarter after last year's destocking ran its course. Capacity reductions in Europe and the strong dollar's curb on imports from the US mean price rises are going through "fairly quickly", according to industry sources. Indeed, the European price of so-called kraftliner (paper for corrugated packaging made from fresh wood) rose 3 per cent alone in the first week of October and is up 11 per cent since February.

Mondi's low-cost model is generating a return on capital of 13.3 per cent, which is impressive at this stage of the economic cycle. And generating €353m of cash from operations helped bankroll an 8 per cent increase in the half-year dividend. Expect a similar outcome for the full year given the health of the balance sheet. Mondi predicts net debt of just 1.7 times cash profits at the beginning of 2013, but UBS believes earnings from acquisitions should get that down to 1.4 times later in the year.

What's more, if demand improves in Europe, the upside for the share price could be substantial. According to broker Jefferies, if Mondi can grow organic revenue by 2 per cent a year to 2014, and deliver EPS of 82¢ and cash profits of €1.1bn in 2013, the shares could be worth 820p.

That doesn't seem far-fetched, especially now that Mondi has sold half of its share of the Aylesford newsprint business. True, it had to take a €71m hit, but supplying paper to national newspapers is a dying trade.