Mondi’s earnings for the six months to end-June are set to surge as much as 37% even as global economic growth slows, thanks to tight cost control and diverse products.
The strong earnings growth in the packaging and paper sector is, however, expected to reverse in the next six to 12 months due to pressure on demand and selling prices, according to an analyst.
The global packaging and paper group, whose interim results are due on August 1, on Tuesday said it expects basic underlying earnings per share to increase by between 4% and 11% to between 93 and 99 euro cents.
Basic earnings per share are expected to rise by between 28% and 37%, while basic headline earnings per share are expected to be up 9%-16%.
Mondi, which manufactures and sells packaging and paper products, said it expects underlying earnings before interest, taxes, depreciation and amortisation (ebitda) for the six months to exceed the €852m reported in the same period in 2018.
Wade Napier, London-based diversified resources analyst at Avior Capital Markets, said on Tuesday internal growth investments, acquisitions and favourable selling prices supported earnings growth in the sector.
“I believe that over the next six to 12 months, the positive earnings growth seen today should reverse as the industry faces pressure on demand and selling prices,” he said.
“The industry is cyclical, so prices are constantly moving up and down. The trick for the companies is to not over-indebt themselves during times of low selling prices because that is when profitability can really become negatively impacted.”
The IMF on Tuesday lowered its global economic growth forecast for 2019 by 0.1 percentage points to 3.2%.
Electus equity analyst Mish-al Emeran said Mondi had a strong track record of disciplined cost control and “that coupled with diversified paper and packaging products and grades helps in its ability to withstand challenging markets”.
Ron Klipin of Cratos Wealth said the slowing global economic growth had negatively affected demand. “However, once there is recovery, supply and demand should come back into equilibrium.”
He said Mondi had delivered growth in a deeply cyclical industry, saying management had demonstrated good judgment on capital allocation.
Klipin said growth in online retail had increased the demand for packaging, especially in developed economies.
“A prime example is Amazon’s e-commerce business, which has escalated whilst retail shopping malls have been in decline,” Klipin said. The backlash against plastic packaging is likely to result in a switch to paper packaging, he said.
Mondi shares gained 2% on Tuesday to R314.
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