There are four main moving parts that affect profits and cash flow at Mondi, the packaging group. One is the amount it can charge for its various products, particularly kraftliner, the basic substance off of 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.
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