⏩ Speedy thesis #8: Mondi + review
Stocks that pay a dividend while you wait for capital appreciation.
Speedy thesis works as a starting point for investment research: presenting potential opportunities and helping readers to do further research on companies and stocks that fit into their own (dividend investment) strategy.
In the issue number eight I have included one thesis covering a British/South African paper and packaging producer and a review of the past publications.
A | Mondi - paper and packaging. Dividend yield 5.2%.
B | Review of the past publications and performance.
A | Mondi ($MNDI)
🔑 Low relative and absolute valuation, low indebtness, histroically low valuation based on P/B, special situation with the Russian operations, good dividend.
📉 Industry is in a downturn due to the weakening consumer demand and softness in ecommerce, lack of transparency due to semi-annual reporting, dividend cut in the recent past.
An excellent article from
led me to look at Mondi, one of the leading paper and packaging companies in Europe. The stock has declined over 40% of its highs along with the market and in anticipation of declining earnings from historical high profitability. The stock just took another plunge towards the covid lows. In the last trading update the management highlighted declining prices and volumes.Destocking and softness in consumer demand will hurt the company, but in the long-term the company should benefit from the growth of ecommerce and the change towards more sustainable packaging solutions. Mondi is a vertically integrated producer, it uses most of its pulp for its end products and produces internally most of the power needed in its factories.
Mondi is a cyclical stock. It doesn’t yet look expensive which is usually the best time to buy cyclicals - but better to be prepared when we get there.
Thesis 💡
Excellent financial performance among the peer group historically.
Returns on capital are pretty good for an industrial company combined with low indebtness (net debt/EBTIDA 0.6x and total debt to equity of 33%).
One reason to the relative valuation discount could be the domicilation in South-Africa and United Kingdom.
The stock has declined heavily in the anticipation of the earnings contraction and several multiples are approaching historically low levels. However, forward looking P/E-multiple stands at the historical mean. P/B-multiple stands near 10-year low.
The past 10 years Mondi has delivered rather stable margins and good level of cash flow. It has an investment program of €1 billion, which it should be able to finance from the cash generated by the business.
Mondi’s Russian operations generate a large chunk of its EBITDA (35% in Q1). In the beginning of June Mondi withdrew from the sale of the operations. Citibank was expexting an extra dividend of 4-10% from the sale.
If the consumer demand is more resilient than it looks like, Mondi is a top choice in the industry.
Cons
It’s difficult to see where the bottom will be, but at some point the assets of the company should mean something.
Several companies in the industry have issued profit warnings and some trade even at lower multiples, e.g. Stora Enso with a P/B of 0.7, but with higher NTM P/E, inflated balance sheet by forest valuations and lower returns on capital.
Corrugated packaging (second largest segment by EBITDA) has the highest return on capital emplyed. This division is likely to be hit by slowdown in the consumer demand. Mondi is also exposed to structurally declining fine paper sales which generate 23% of EBITDA.
The company doesn’t publish quarterly reports. H1 results will be published on 3rd of August.
I wrote a Seeking Alpha analysis elaborating on Mondi. More graphs available there.
B | Review of the past Speedy theses
Below I have included a table listing all the past theses and stock price at the time of publication, my conclusion about the thesis and stock price now.
A brief commentary on selected lines:
Medtronic: Personally I’ve managed to buy twice around at $80 and sold twice at $90. Now my position in miniscule and I would increase my position if we get between 70-80 dollars.
Levi Strauss: I still believe the stock is a buy below $15 and naturally future returns look brighter the lower it gets. I managed to sell some over $15 and considering buying back at around $14.
Weyco: The stock went to around $27-28 and I exited the whole position.
Woori Financial: I sold half of my position at a small loss. I believe the stock is still trading at a discount to its peers but there might be a good reason I haven’t spotted.
Standard Motor Products: The stock is back to the buy zone.
Polaris Renewables: Stock is now again back to the starting point. I managed to sell 1/3rd of the position at around 15 CAD. I’m considering to buy that portion back.
Core&Main: It’s surprising how well the stock has performed. Unfortunately I sold a bit too early although there was no change in the thesis other than the macro picture and a secondary stock offering.
Relais: The stock went quickly nearly to €15 and has retraced a bit. I believe the thesis remains intact. Unfortunately I didn’t buy enough at the time of writing.
Global Industrial: This worked out well. I have sold 1/3 to the lock in some quick gains.
Going under with AAP
I made a terrible mistake with Advace Auto Parts and therefore the mistake deserves a brief chapter of its own.
I believe there are a couple of root causes for the mistake. First, I looked too much in to the rear view mirror and gave too much weight on the historical figures. Second, I relied too much on the guidance provided by the management. Third, I was not able to anticipate such a deterioration of their business. I believed that AAP’s business was more resilient to the competition and market environment, but I was wrong. I sold my position and took a heavy loss.
My twitter handles
🇬🇧 English: @paidwait
🇫🇮 Finnish: @anttisleinonen