• FY 20A results (revenue: -2%; EBIT: +5%, EPS -1%) saw strong margin expansion despite top line pressure: COVID-19 shaved GBP 15m (2.3%) off EBIT, impacting March and April. North America lagged the group, with margin contraction of 842bps y/y as domestic performance was weighed down by negative export paper pricing. Group ROCE contracted by 300bps to 10.6% (Mondi FY 19A: 19.8%, -380bps y/y), well below their MT target of 12-15%.
  • “Happy to be over cautious”, dividends suspended (2-2.5x cover). Despite DS Smith noting that “dividends are the primary return for shareholders”, dividends have been postponed. We note that liquidity is not a problem, with GBP 1.4bn of undrawn facilities and no significant refinancing until FY 23e. Gearing (net debt/EBITDA: 2.1x) under control, which was supported by the Plastics disposal (over GBP 400m).
  • DS remains focussed on lowering their integration levels from 80% to 60%: Their capacity is geared towards packaging (downstream) and prefer to be short testliner (low barriers of entry, in their view), with less capital tied up. They want to reduce their paper position as soon as possible and accordingly continue to review non-core assets. Future capital allocation focused on organic growth in the US and Europe and are not looking at M&A right now but do see opportunities in the next 24 months amongst the independents.
  • Cost pressures to be seen in H1 20e: DS consumes c.4mtpa of OCC (Mondi: 1.3m). YTD, OCC prices have increased by 77%. Additional Hygiene and other costs related to COVID are expected to be GBP 30m.
  • COVID has accelerated MT structural trends, such as e-commerce, digitisation and consolidation of suppliers: Key trends have included a sharp increase in e-commerce. According to an EY Future Consumer Index, 51% of global consumers say the way they shop will fundamentally change and that 44% of global consumers will do more grocery shopping online. All of these factors will benefit corrugated demand in the MT.
  • Despite FMCG (72%) and e-commerce (11%) comprising 83% of their volumes, box demand is surprisingly under pressure due to their industrial exposure (17%). Industrial volumes are down 20-30% in recent months, which has impacted their like for like corrugated box volume: April -4.5%; May -4.7% and June -4.0%). However, DS expects box demand to improve.
  • Unpacking corrugated volumes progression, North America was hit the hardest (-15.9% in April and -13.7% in May): In Europe, Southern regions were hit the hardest (-11.7% in April and -12.6% in May). Eastern Europe held up better but was still in the red (-8.0% in April and -6.3% in May). Conversely, Northern Europe printed positive growth (+6.9% in April and +5.7% in May). We note that Mondi’s corrugated is mostly exposed to CEE, Russia and Turkey, while they play containerboard in all Europe, Russia and SA and export (mainly specialty grades) to other markets in Asia and Central America.

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