Mondi is viewed by many as an old-economy paper company, with inherent cyclicality and shrinking markets. In our view, the global packaging and paper giant is firmly entrenched in the new economy, and is distinguishing itself through a relentless focus on profitable capital allocation. We remain comfortable in holding the stock.
Mondi may once have been primarily a paper company, but today three quarters of its revenue comes from packaging and only a quarter from paper. It’s now a vertically integrated global packaging and paper group, with around 26 000 employees and a presence in over 30 countries. It offers more than 100 different packaging and paper products, customised into over 100 000 solutions for customers.
About 80% of Mondi’s production takes place in Europe (including Russia). The group is the global leader in kraft paper (thin cardboard) and industrial bags (think cement bags), and the leading European containerboard producer (corrugated cardboard boxes).
We view Mondi as a key part of the new economy for two reasons:
The shift away from bricks-and-mortar retail to e-commerce is resulting in increased demand for packaging, typically in some form of cardboard box
The rise of environmental awareness is driving a switch away from plastics towards more recyclable forms of packaging – largely paper-based.
Just as there were ways to get rich during the San Francisco gold rush other than from actual mining (for example, by selling shovels, inventing Levi’s jeans, or running a saloon), we see Mondi as capitalising in a different way on the rise of e-commerce in Europe and making profits in the process – unlike most e-commerce players.
Given the commoditised nature of much of its product, Mondi is something of a resource company, so it needs to be low on the cost curve. Product prices are substantially less volatile than those of metals or energy commodities, however. The integrated nature of the business means it should be viewed more like a chemical company, adding value to its base inputs of wood and recycled paper. The group’s multiple product streams, many with substantial value-add, insulate it from fluctuations in the price of wood.
Over 60% of the group’s capacity is in the bottom quartile of the relevant cost curves, with a further 20% in the second quartile. Compared to its competitors, a larger proportion of Mondi’s production takes place in Eastern Europe, where labour is cheaper. The group continues to focus its expansionary investment in this area, further embedding its structural cost advantage over its Scandinavian peers.
Mondi’s key sustainable competitive advantages are scale in its markets and deep integration into customer processes, which create switching costs.
The business typically converts over 90% of accounting operating profits into cash, enabling it to invest in expansion while also paying out healthy dividends. The group should be able to sustainably generate around 20% return on capital employed (24% in 2018, and an average of 21% since 2015), which is well ahead of its cost of capital. Accordingly, Mondi should maintain its path of steadily increasing its intrinsic value.
What we like most about Mondi, however, is its relentless focus on optimising capital allocation. The management team is proactive in its decision-making (particularly around cutting underperforming assets), which means capital is continuously being recycled to areas where it’s likely to generate the best return.
In many companies, the possibility of management reinvesting profits into unprofitable (or less profitable) ventures is a real concern. Think of Anglo American’s US$13 billion investment in Minas Rio, or Telkom’s investment in mobile: neither of these endeavours generated free cash flow for a decade. In the case of Mondi, the opposite has happened: judicious investment has over the past 10 years consistently improved the quality and return characteristics of the group.
As always, great businesses are great investments only when you pay an appropriate price for them. Mondi’s current valuation is undemanding at an 11 times forward price-earnings multiple and a 4% dividend yield*.
We expect Mondi to continue to beat its cost of capital, thereby sustainably increasing its intrinsic value. Accordingly, we remain happy holders of the stock.
* All figures are correct as at 6 May 2019.
We can assist you with
Discretionary investment management
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.