Mondi: a world of its own

The sheer volume of deliveries by online retailers such as Amazon should be working wonders for the purveyors of the specially corrugated cardboard they use with such abandon. In the paper and packaging industry, where newsprint and coated paper face overcapacity and digitally induced decline, packaging is the place to be.

Take the example of Johannesburg and London-listed Mondi, which has operations in central Europe, North America, Russia and South Africa, and derives about 70 per cent of its revenue from packaging. Its share price leapt by 10 per cent on Wednesday, leading the FTSE 100 index. The trigger? A near-30 per cent surge from a year earlier in its first-quarter operating profit to €236m.

Mondi reported steady demand for its packaging products across all but its South African home market, at selling prices broadly the same as a year ago. Its margins increased as it benefited from dollar strength against the euro and lower input costs, including wood (it grows its own), recycled paper, resin (used in plastic packaging), energy (it generates its own in South Africa) and chemicals. After pushing through price increases it should be able to sustain its momentum in the current quarter, even if maintenance costs and a higher oil price (used in resin) are drags.

Mondi looks to be in a sweet spot. But can it really sustain last year's punchy return on capital employed of more than 17 per cent - 10 percentage points above its low mid-crisis, when a good deal of surplus capacity fell away? The risk is that, tempted by such returns, rivals restore some of that closed capacity. So far, there is little evidence - and the lead time for such projects is up to three years. Moreover, the latest sector consolidation, evident in the merger of RockTenn and MeadWestvaco of the US, should help to cut capacity and underpin pricing.

What happens in two to three years is anyone's guess, but it is hard not to want to bag some of Mondi's returns - yours for 17 times this year's earnings.

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