Mondi continues with investment despite inflationary pressure

Mondi (MND) results have followed the general trend in the packaging industry. It has experienced cost inflation because of the rising price of energy and raw materials, but has managed to offset it through an increase in its own pricing and the continued demand for e-commerce. In short, revenue was up, but higher costs mean that Ebitda (cash profit) was flat. However, once you strip out some maintenance costs and currency fluctuations the profit picture looks a little rosier.

The packager's revenue was up 5 per cent but due to the increase in input costs (around 8 per cent), its underlying cash profit was down 4 per cent to €709m (£601) This drop in profit fed through to its free cash flow, which was also down from €602m to €552m. Underlying margin also dropped from 21.4 per cent to 19.5 per cent. Management is expecting cost pressures to continue into the second half of the year so it’s likely they will continue to drag on profits in the near term.

The good news is that a big reason for the drop in profits is the maintenance work it was doing on a mill in Russia and the temporary closure of another mill in South Africa. It estimates that there was a €50m impact on underlying cash profit from these planned maintenance closures in the first half of the year. Maintenance closures only accounted for a €10m drop in the same period last year. If you strip this out, then cash profit would have been in positive territory. With lots of these projects now complete, management expects €50m of incremental underlying cash profit growth in 2021 from its capital expenditure.

Compared with its competitor Smurfit Kappa (SKG), its capex figures look very positive. In the first half of the year, Mondi invested €286m, which was equal to 140 per cent of its depreciation. Smurfit invested €175m, which was just 63 per cent of its depreciation. Both companies have a similar return on capital employed of around 15 per cent, but Mondi’s higher level of investment should set it up nicely to generate future profits, especially if these inflationary pressures do abate in the next year.

Smurfit is currently trading on a 12 month forward PE of 16.6 while Mondi is on 15.3, according to FactSet consensus. Both companies are exposed to the growth of e-commerce, which is a plus, and of the two Mondi might offer slightly better value given its capex-linked growth prospects. Buy.

Last IC View: Buy, 1,601p, 15 October 2020