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Mondi is benefiting from higher prices

Business Report logo Business Report 2018-10-12 Sandile Mchunu
STRONG Kraft paper demand, helped by a switch from plastic carrier bags, augurs well for Mondi. Antoine de Ras / African News Agency (ANA) © Provided by Independent Media STRONG Kraft paper demand, helped by a switch from plastic carrier bags, augurs well for Mondi. Antoine de Ras / African News Agency (ANA)

DURBAN – Mondi, a global leader in packaging and paper, reported a strong performance in the third quarter to end September, benefiting from higher average selling prices across fibre packaging and uncoated fine paper, good cost containment and contributions from recent acquisitions.

As a result, underlying earnings before, interest, tax, depreciation and amortisation (Ebitda) rose by 30 percent to 466million (R7.85billion), up from 359m compared to last year.

However, the group said that it continued to see manageable upward pressure on its cost base, with input costs up on the comparable prior year period and more moderately up when compared to the second quarter. “The notable exception was paper for recycling costs, where average benchmark European prices were down 42percent on the prior year,” the group said.

It added that cash fixed costs were higher as a result of the impact of mill maintenance shuts and inflationary cost pressures, mitigated by ongoing cost reduction initiatives.

The planned mill maintenance shut-downs during the quarter had an estimated impact on underlying Ebitda of around 30m. Going into the fourth quarter, the group is looking to benefit from stable pricing in key fibre based product segments.

Cobus Cilliers, an investment analyst at 36One Asset Management, said overall this was a great result from a good management team.

“The big uptick in earnings can partly be attributable to the supply in Kraftliner being tight, which in turn caused the price increases over the past twelve months. This combined with good execution and good cost control from the Mondi management team producing a good result for the third quarter,” Cilliers said.

Despite the increase in earnings in the quarter, the group’s share price was down by 1.55 percent on the JSE in early trade yesterday and closed at R347.47. Cilliers said the recent decline in the share price was due to investor concerns over a potential oversupply situation in container board in the US over the next three years.

“The entire paper and packaging sector was negatively impacted on this news. This negative sentiment feels overdone, as Mondi management mentioned in the investor call today (Thursday) that China has taken out more capacity in containerboard than what the US will be adding,” Cilliers said.

Ron Klipin, a senior analyst at Cratos Capital, said consistent delivery by management with good capital allocation skills had resulted in a substantial increase in returns over the past decade.

“Management believes they will not be unduly challenged by rising input prices due to ongoing measures to manage costs. The extensive geographic footprint and integrated business model enables them to control the supply chain,” he said.

Klipin said markets were favourable for Mondi with higher selling prices for fibre packaging, with strong Kraft paper demand, helped by a switch from plastic carrier bags.

“Currently demand exceeds the available supply, so the capacity constraint is positive for pricing into 2019 to 2020,” Klipin added.

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