Mondi Stock: Ongoing Value At The Current Price (OTCMKTS:MONDF)

U.K.-listed global packaging producer Mondi (OTCPK:MONDF) is currently seeing tougher business conditions as a weak global economy affects demand for packaging products, pushing down prices. However, I continue to like the business which I see as a well-run and reliable operator.

I last covered the name in my bullish September 2023 piece Mondi: Tougher Times But Still A Decent Business, since when the price has grown 3%. At that point said that Mondi had a good position in an industry I expect to benefit from strong long-term demand and that the company remained highly cash generative despite short-term headwinds.

Business Performance Has Been Weak

The company’s most recent market update on trading was in October. The firm said that market conditions remained challenging due to the macro-economic environment. Although demand is still soft, Mondi said that lower average selling prices have largely been mitigated by lower input prices and cost control.

Quarterly underlying EBITDA from continuing operations continues to lag last year sharply, although the company was keen to emphasise that the difference compared to two years prior has not been as bad.

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Table adapted from company announcement

The weak performance this year is a symptomatic of a key challenge faced by Mondi, which is that it operates in what is basically a commodity industry. Larger trends in demand are outside its control and there is not much it can do to maintain pricing in terms of market gluts, without hurting its own demand. I see this as an ongoing risk for the company. This followed on from weak performance in the first half, which I covered in my last piece.

Nonetheless, this is a cyclical risk in my view. In the long run, I expect the business to continue to benefit from high demand when the market cycle is in its favour, for example when economies move into firmly expansive mode once again.

I continue to see Mondi as well-positioned over the long term. It has an extensive global site network, existing customer relationships and expertise in a variety of packaging types. It has been focussing on cost control and remains profitable. Last year, for example, post-tax profits came in at €1.3bn, which at current exchange rates equates to around £1.1bn. That was exceptionally good but over half a billion euros in post-tax profits has been the norm in the past few years, yet the company currently has a market capitalisation of under £7bn.

Proposed Special Dividend and Share Consolidation

Last month, the company announced that it had received the last proceeds from its disposal of operations in Russia (Mondi Syktyvkar). The total cash consideration was 80bn rubles.

The company is proposing a special dividend and share consolidation. The special dividend is of €1.60 per share and there will be a 10-for-11 share consolidation.

Risks

As the Russian divestment served to remind investors, the wide global reach of Mondi’s business brings risks.

For now the inflation risk that was prominent before seems to have receded and I think the key risk for profit is weak market demand. Over the medium- to long-term, however, I expect demand recovery and prices to increase accordingly.

Valuation Continues to Look Attractive

Coming back to that market capitalisation, Mondi is trading on a single-digit market capitalisation based on last year’s earnings.

We already know based on the first nine months that this year’s earnings look unlikely to come anywhere near last year, though guidance from the company has not been forthcoming on what to expect.

But, based on historical earnings performance and my expectation that over time in a cyclical commodity industry, Mondi will likely revert to the mean, it continues to trade on a P/E ratio of around 10, which I see as good value.

The dividend yield is an attractive 4.4% (slightly higher than the current FTSE 100 average) and the dividend has continued to grow in recent years. This year saw the interim dividend increase by 8%. Excluding the impact of the special dividend and share consolidation, I expect to see ongoing dividend growth. Dividend cover has been 1.4x earnings even in the leanest of years lately and last year was double that level, meaning there is space for ongoing growth.

Mondi is not an exciting company but I continue to see it as a solid one and see potential for the share price to move up in the next upwards move in the economic cycle (it is 31% lower now than it was in 2021). At these levels, I maintain my “buy” rating.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.