Lower average selling prices and negative currency effects offset paper and pulp packaging group Mondi’s lower costs in the third quarter of 2020.
The world’s largest producer of dissolving wood pulp has remained resilient despite Covid-19, saying it is in a position to resume dividend payments. It also remains positive for the year.
Analysts said on Thursday that Mondi’s performance remains resilient, and that the business is well run. The group has prioritised cost reduction amid high raw material prices.
Covid-19 boosted demand for some products, such as e-commerce packaging, while Mondi has cited its sheer size as a benefit as customers sought stable suppliers and made large orders that needed delivery on short notice.
The group said on Thursday that underlying earnings before interest, taxation, depreciation and amortisation was down 20% year on year to €306m (R6bn) in the three months to end-September, its third quarter.
It is also a 13% fall from the three months to end-June, with the group also citing the effects of planned maintenance shuts. A weaker dollar, rouble and Turkish lira also weighed on the group during the period, with Mondi expecting a further negative effect in its fourth quarter.
Covid-19 demand
Mondi said in a trading update that its corrugated packaging division — which generated just over a quarter of its interim revenue — continues to benefit from e-commerce demand.
A further bright spot is that Mondi is in discussions with customers about price increases for various grades of containerboard — given its strong order book and inventory levels. Containerboard is used for boxes, and has been under pressure in recent years from global oversupply.
Uncoated fine paper demand has improved as lockdown restrictions in Europe, Russia and Southern Africa eased with a gradual pick-up in activity in schools, offices and commercial printing, the group said, though it remains down year on year.
Uncoated fine paper generated just over a fifth of the group’s interim revenue.
The group’s largest division by revenue, flexible packaging, was under some pressure as some customers sought to reduce inventory levels. This includes items such as bags for cement or agricultural products, and the division generated 40% of interim revenue.
Nesan Nair, a senior portfolio manager at Sasfin Securities, said while Mondi had been under some pressure from lower prices and volumes for uncoated fine paper, it was still left with some €1bn in liquidity, after settling some debt and paying dividends.
“It continues to be run well with cost reduction initiatives in place and still very cash flow generative,” he said.
Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said it was a resilient third-quarter performance, with cost controlled, and the company remains cash generative and has a healthy balance sheet.
“Management appears confident in being able to get price increases through next month, which would be a big step in reversing the two-year downward trend we have seen in pricing for Mondi,” said Van Vlaanderen.
He said, however, he is concerned about the near-term pricing environment for containerboard, and the industry may not be able to raise prices sustainably given a huge amount of new capacity starting up in Europe.
“Longer term, Mondi is a good operator, low cost and exposed to structural growth categories. It ticks all the boxes from a sustainability perspective,” he said.
Mondi’s share was down 3.71% to R343.86 on Thursday.
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