Home news Mondi profit warning sees shares crumple

Mondi profit warning sees shares crumple

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There’s been an unpleasant crumpling of paper and packaging shares following a profits warning from Mondi.

You may not have heard of this company but, courtesy of its membership of the FTSE 100, the chances are that you will indirectly own shares in it via tracker funds held by your life policy, pension fund or ISA.

For Mondi is a business with a stock market value – even after the latest profit alert – of £10bn.
And while its origins are in South Africa and its corporate headquarters are in Vienna, it operates out of no fewer than 40 locations in the UK, including manufacturing sites at Deeside, North Wales, Nelson in Lancashire and Scunthorpe in Lincolnshire.
It used to be bigger still in Britain, having until 2012 owned the newsprint supplier Aylesford, whose paper was used by titles including The Times, the Daily Mirror and The Observer.
Previously part of Anglo American, the international mining giant, it was spun off as a separate business as its own right in 2007 and has spent most of the intervening period in the FTSE 100.
It has not been a bad investment, either, with the shares delivering a 322% return during that period compared with one of just 20% from the FTSE All Share index.
This has been bolstered by rapid growth in recent years following acquisitions in a number of countries and, in particular, emerging markets in Asia and central and Eastern Europe.
During the last four years alone, Mondi has spent €1.6bn (£1.4bn) on acquisitions, with more deals promised.
These, in theory, should be boom times for Mondi.
Paper and packaging sounds relatively unglamorous as a business activity yet, as globalisation swells the ranks of the middle classes in markets like India and Turkey, more people are buying more things – and that means more paper and packaging.

Image: Mondi was the biggest FTSE 100 faller after its profit warning
The rise of e-commerce in developed markets, meanwhile, has also created a demand for packaging.
Accordingly, the company has grown full year operating profits from €547m in 2012 to €943m last year, with sales also rising solidly in that time.
So what appears to have gone wrong now? Well, a couple of things.

Firstly, the company has been caught out by currency issues, chiefly the US dollar – the weakest-performing major currency this year – and a fall in the Turkish lira.
At the same time, input costs have also bitten, with Mondi citing higher wood, energy and chemical costs than in the same period last year.
The price of recycled paper, which is being demanded by increasing numbers of customers for environmental reasons, was up 15% during the third quarter of the year from the corresponding period a year ago.
There have also been closures, for maintenance, of some of the company’s paper mills.
The company added: “Continuing cost pressures and negative currency impacts are expected to result in an underlying performance for the year modestly below market expectations.”
That has been enough to send shares of Mondi down by nearly 8% and also drag down shares of other packaging firms, including Smurfit Kappa, the Irish packaging giant which is also in the FTSE 100 and DS Smith, the British group that sits just outside the index.
Should investors panic? Probably not.
Yes, sentiment in companies like this is always going to be influenced by short-term currency fluctuations and short-term price movements that – as has been seen – can blow profitability off-course for one or two quarters.
Yet this is a company that, for many years, has enjoyed industry-beating returns and which is operating in an industry in which big is beautiful and which is consolidating.
It is also operating in a sector where, as DS Smith has shown, innovation is prized by customers.
Mondi recently bought Excelsior, a British business that has a reputation for coming up with bright ideas in food packaging, an area in which Mondi has previously not had much of a presence – but in which, with its strong global distribution, it could easily roll out innovative products and gain market share quickly.
Those investors of a short-term persuasion may well have thrown their share certificates in the waste-paper basket.
Others taking a longer-term view will keep them on their desk under the paper-weight.

Source: SKY