Packaging portfolio helps grow Mondi profit

David Hathorn.

Picture: Supplied

Cash generated from operations of €620m jumped 15% as the group invested in capital projects and strategic acquisitions to enhance its packaging portfolio. CEO David Hathorn said on Thursday Mondi was investing in high-end consumer packaging output, including laminated films and pouches for food products, where there was good volume and margin growth.

"This is an important area of businesses for us — it is growing fast."

He said that Mondi had seen strong contributions overall in the interim period from consumer packaging, uncoated fine paper and its South African operations. But this was partially offset by price weakness in certain packaging paper grades.

"In April 2016 we completed the acquisition of a corrugated packaging plant in Poland, and we have recently completed two acquisitions that will further enhance our product offering and geographic reach in the growing consumer packaging segment," Hathorn said.

He said the second half of the year would be affected by planned maintenance shutdowns at a number of the group’s mills, along with the usual seasonal downturn in its uncoated fine paper business.

The group said that pricing movements in its key paper grades were mixed, with domestic currency selling prices significantly up in uncoated fine paper, more modestly up in the South African division, and down in packaging paper compared with the same period a year ago.

Input costs for wood, fuel and energy were generally lower in Mondi’s Europe and international businesses. In the South African division, higher domestic wood costs and inflationary increases contributed to higher variable costs in rand currency terms, partially offset by higher energy sales.

Meanwhile, a significantly higher fair value gain on forestry assets reduced the net cost base in SA, as the export price of timber rose.

"Mondi remains an extremely well-managed business, which has consistently invested in improving its manufacturing footprint, helping drive cost savings from an already very low-cost manufacturing base," Dirk van Vlaanderen, investment analyst at Kagiso Asset Management, said.

"It has also been expanding into the higher growth consumer-focused packaging markets, where pricing power and end demand is more robust. This has helped offset some of the weakness seen recently in its core packaging paper and fibre packaging divisions.

"In the packaging paper division, specifically, the market dynamics have resulted in significant new competitor capacity coming on stream. This, coupled with higher imported product, has meant that local market pricing has come under pressure," he said.

But Van Vlaanderen said Mondi’s management believed they had "largely cycled through this pricing weakness and, despite this near-perfect storm", the company had continued to deliver a strong set of results. Underlying earnings per share were up 11% in euros and the group’s interim dividend rose 30%.

Justin Jordan, an equity analyst at Jefferies International in London, said that with Mondi garnering the benefit of major capital investments in 2015, Jefferies’ earnings outlook for 2016 remained unchanged.

He rated the dual-listed London and Johannesburg stock a "buy" at a target of 1,800p per share in London, up from a share price of about 1,534p now.

Hathorn said that Mondi’s core focus was on continued growth in packaging. This included organic growth and acquisitions across the spectrum of consumer packaging. He said "flexi-packaging" for foods, including pet food pouches, and release liners for female and infant care products, were a big focus for the group. The latter, special adhesives products, were widely used in medical applications, labelling and tapes, along with numerous general industrial uses.