Mondi: winning at inflation, but what is Russia worth?

In the first quarter of 2022, customer demand for Mondi’s products was strong enough to offset the impact of cost pressures, as Mondi could achieve higher average selling prices. This is music to the ears of any investor, with most companies currently seeing margins deteriorate in an environment of exceptional cost pressures.

In Corrugated Packaging, Mondi managed to pass on higher input costs. In Flexible Packaging, discussions are underway with customers regarding further price increases. Uncoated Fine Paper is enjoying favourable supply-demand dynamics and implemented price increases in 2021 and this year, with the only negative news being that the Merebank operations in South Africa were impacted by the floods (this doesn’t have a material impact on group performance). Finally, Engineered Materials achieved a “stable” performance this quarter.

The pressure on input costs came from a wide variety of sources: energy, resins, transport, wood and chemical costs. Currency movements also weren’t favourable.

A further headwind for EBITDA came from scheduled maintenance, with a EUR20 million impact this quarter and a full year estimated impact of EUR110 million.

Despite this, the EBITDA result is incredibly good with growth of 63% year-on-year and 41% vs. the previous quarter. Of the EUR574 million in EBITDA, EUR117 million was in the Russian operations. This means that 20% of group profitability was in Russia, which is why the share price is down by a similar percentage this year.

The group has decided to sell its assets in Russia based on the humanitarian impact of the invasion of Ukraine. At this stage, no deal has been lined up and there’s no guarantee that a deal will even happen. The Russian business had a net asset value at the end of December of EUR687 million. In the meantime, all capital expenditure projects in Russia have been suspended.

At the end of March, net debt to EBITDA was approximately 1x, so the balance sheet is strong. The sale of the Personal Care Components business is expected to be completed in the second half of the year. Mondi has a capital investment pipeline of around EUR1 billion which the company believes will achieve “mid-teen returns” when in operation.

The share price rallied 5% yesterday and I’m not surprised. The sell-off this year implied a total loss of the Russian operations. With the rest of the business doing incredibly well, any value achieved for the Russian business could bring share price upside from here.

This is an interesting play in my view.

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