Business is booming for packaging specialists, with barely room to fit a cigarette paper between the three leaders of the pack.
Mondi, the biggest of the main listed companies, put out an enviable trading update yesterday that suggested it was on course for another year of strong profits. That the shares closed down ½p at £17.75 shows just how bad the market rout is and how the sector has suddenly found itself out of favour.
Mondi was founded in South Africa in 1967 by Anglo American when the mining group built the Merebank mill in Durban. It has expanded steadily organically and through strategic acquisitions of paper mills and specialist paper, plastics and packaging companies. In 2007 it was spun out of Anglo and took two listings, one in London and the other in Johannesburg.
As well as producing paper, boxes and other packaging, Mondi is an expert in plastics and makes the pouches that contain the food for pet cats and dogs. It operates in more than 30 countries, from Germany, Russia and Poland to Oman and Morocco, employing more than 26,000 staff and generating annual revenues of more than €7 billion. Its two large quoted rivals are DS Smith and Smurfit Kappa, which is listed in Ireland as well as London.
Mondi’s trading update covering the period since the end of June was strong. Underlying profits for the third quarter were up by 30 per cent against the same period last year to a record €466 million and were 4 per cent higher than the previous quarter. It benefited from higher selling prices for the fine paper and fibre packaging it makes, which it uses for its own packaging and sells to other producers. Mondi said that cost control was good and that it had benefited from recent acquisitions, including that of Powerflute, the operator of a pulp and paper mill in Finland. There were some minor blips: shutdown costs from mill maintenance projects were on the up and prices for paper for recycling were down 42 per cent on the previous year.
Although it is tied to the global economy, the paper and packaging sector has been on fire for nearly four years, driven by the rise of Amazon, in particular, and online shopping in general, with goods delivered to your door in corrugated cardboard boxes. As a fragmented market, it is ripe for consolidation.
However, there has been a sharp sell-off over the past three weeks, prompted by two things: first, China has imposed a ban on imports of low-grade paper for recycling; and second Nine Dragons, a Chinese company, has begun to invest heavily in two paper and pulp mills in the United States, creating fears of a massive oversupply that would hit prices and rivals’ orders.
With much of the paper for recycling that would have gone to China stuck in mainland Europe, prices have been on the slide. Mondi’s share price has lost more than 15 per cent this month and those DS Smith and Smurfit Kappa have suffered similar falls. The fears seem overblown. In Mondi’s case, less than 10 per cent of its business is in North America. Almost 80 per cent of its business is in western or emerging Europe and Russia and the lower paper price benefits it because it buys paper as a raw material for its own recycling. While Mondi is exposed to the unfashionably polluting area of plastics, it is probably in the best bit of it, the flexible packaging that uses 70 per cent less plastic than solid containers.
Trading at 14.7 times last year’s earnings, the shares are the cheapest in the sector, although their yield at just above 3 per cent, ignoring the effect of last year’s special payout, is less than those of DS Smith.
Advice Buy
Why It is exceptionally well positioned to capitalise on rising demand for packaging and the shares are good value
Moneysupermarket
It’s tentative, but there are signs that the reinvention of Moneysupermarket.com is taking shape. The price comparison provider told investors in February that profits would be flat this year while it ploughed £5 million into a reorganisation that includes hiring product engineers, refreshing its website and exploring new markets.
Stock markets tend not to be very good at patience. Moneysupermarket shares have lost 18 per cent of their value since then, although they gained ground yesterday, adding 11p to reach 275p after the group gave an update on trading over the three months to the end of September.
Moneysupermarket was an early mover in price comparison. It was founded in 1993 by Simon Nixon, the billionaire entrepreneur, who was chief executive until 2008 but is no longer involved. It has three divisions — insurance, money and home services — offering price comparison on pretty much everything from car cover to loans to energy bills to package holidays. As of early August, it has started to make inroads into providing services to business customers after buying Decision Technologies, which specialises in broadband and mobile deals and has already brought in revenues of £4.6 million.
Headline revenues grew by 7 per cent to £96.4 million in the third quarter, taking growth over the nine months to 6 per cent, up from a 5 per cent increase during the first half.
Within this, the money division grew more rapidly during the quarter. Insurance slowed a bit, up 2 per cent against 3 per cent during the first half, but that was due to falling prices and a traditionally quieter period for customer renewals. Having advised shareholders to brace for a large fall in revenues at home services because of a blowout comparable period last year, the division came in flat in the third quarter, with revenues 12 per cent higher at £37 million over the nine months.
This column last looked at Moneysupermarket in April and recommended investors hold when the shares were 297½p, since when they have lost 7.6 per cent. They cost about 19 times last year’s earnings and yield about 3.8 per cent. Keep your nerve.
Advice Hold
Why It is making clear progress in its reinvention, which should bring rewards
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