There are four main moving parts that affect profits and cashflow at Mondi, the packaging group. One is the amount it can charge for its various products, particularly kraftliner, the basic substance from which the rest tend to be priced. The second is the degree that its production facilities have to be shut down for routine maintenance and the disruption this causes to supplies.
The third is the amount of capital spending going into those facilities. The fourth is an oddity, the fair value of its South African forestry assets, which are written up or down with each trading statement. Mondi is based in Johannesburg and has a quote there and in London, where it is a constituent of the FTSE-100 index.
To take the last, the first half of 2016 was particularly strong because of demand in Asia, and this year’s gain on the value is €28 million lower at €20 million, impacting on the reported figures from South Africa. Pricing, though, is very strong. Mondi and others have forced through an increase of €100 a tonne already this year with another €50 to come, which will feed into the second-half performance. The price of kraftliner, typically about €500 a tonne, is now approaching €600 with no sign of new capacity opening up in Europe.
The first-half figures were affected by a shutdown that was slightly longer than expected in Russia and another in Poland. The full-year impact will now be about €10 million higher than thought at €90 million. Capital expenditure, though, this year and next, is running at the lower end of estimates.
That South African forestry number and those shutdowns meant underlying operating profit fell from €529 million last time to €497 million, on revenues 8 per cent ahead. The pre-tax figure was €20 million lower at €462 million.
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Mondi generated €592 million of cash flow in the first half, about equal to last year, and with borrowings running level with annual earnings at some stage some will have to be returned to investors as a special dividend, perhaps as early as February with the full-year figures. For now the interim dividend is increased marginally from 18.81 cents to 19.1 cents, suggesting a yield approaching 3 per cent.
For now the shares, off 54p at £19.48, sell on a bit less than 15 times this year’s earnings. Despite their strong performance over the past year that does not look expensive given Mondi’s high margins and strong market position.
My advice Buy
Why Mondi’s good market position and high margins are attractive. Price rises will help the second half and there is a chance of special dividends
UDG Healthcare
The market appears to be pricing in an awful lot of growth from acquisitions into shares in UDG Healthcare. The group got rid of an old Irish pharmaceuticals business last year and is redeploying the proceeds and its strong cashflow into higher-value areas in healthcare, such as consultancy and communications.
The third-quarter trading update shows that $200 million has been spent since the start of the financial year in October, including two deals arranged since June. The timing of others is hard to predict but the company is confident that another decent-sized purchase can be carried out by the end of the year.
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The trading update shows a healthy third-quarter performance and for the year so far, well ahead of the same period last time.
UDG is experiencing organic growth in the high single digits and the benefits of earlier acquisitions, even if the lower pound is a headwind for a company that receives more than half its revenues from the United States and has chosen to report in dollars.
One slight hitch is a year’s delay reported this summer in American plans to tighten up on labelling of pharmaceuticals to stop them being diverted to illicit markets. UDG has been gearing up for this and has bought another facility in the US. The delay is not that significant but has slowed the pace of take-up for its services.
UDG shares, below £6 a year ago, lost 20p to 820p on the update. They sell on a chunky 30 times this year’s earnings, which looks high.
My advice Take profits
Why Much of the good news seems to be in the share price
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Centamin
Shareholders in Centamin must be thankful they are not holding Acacia Mining, another African-centred gold mine, if they are not because both are popular with retail investors. There has always been concern over potential political risk at Centamin because it has assets producing in one country — Egypt. The circumstances at Acacia, where some exports have been halted because of a row with authorities in Tanzania, shows just how dangerous political risk can be.
Centamin is in a more stable condition, not least because this year it will send its first full payments to the Egyptian authorities from the proceeds of its Sukari mine. The interim figures provide a dividend of 2.5 cents and they raise the prospect that exploratory drilling elsewhere at Sukari may lead to higher production, even if finding other reserves in western Africa still seems a way away.
Centamin has plenty of cash in the bank, threw off about $50 million in the first half and is producing at less than two thirds of the world gold price.
For investors, the problem is always the uncertain prospects for dividends, which can vary wildly. With the shares towards the top end of their range, probably high enough.
My advice Avoid
Why Dividend flow is inclined to be erratic
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And finally...
Spirent Communications has been a volatile share. It makes equipment that allows telecoms companies to test products and networks, and revenues have been unpredictable. There are signs that stability is returning and the shares are up by almost a fifth this year. Interim results showed revenues static but adjusted operating profits up two thirds to $17.4 million. There will be some second-half weighting but prospects for revenues are good. Cashflow is growing and Spirent had $110 million in the bank at the half-year close.