• Mondi will provide a Q3 22E trading update this Friday: We expect EBITDA to increase by 74% y/y (+4% q/q) to EUR 500mn (Q3 21A: EUR 287mn excl. Russia). We expect the impact from planned maintenance to be similar compared to Q3 21A (EUR 30mn).
  • Q3 22A key price and FX moves: UWF increased by 52% y/y (+8% q/q); OCC increased by 8% y/y; however, decreased by 7% q/q. Kraftliner increased by 26% y/y, while it was only up 1% q/q. Based on July prices for sack kraft, we estimate that prices were up at least 17% y/y. In terms of FX (vs. the EUR), Mondi benefitted q/q from a weaker ZAR, stronger USD, while the Turkish Lira continues to remain a headwind.
  • Potential special dividends from Russia disposal at spot FX equates to ZAR 62.64/share (23% yield): In August, Mondi entered into an agreement to sell Syktyvkar for c. EUR 1.5bn, coupled with cash of EUR 255mn and indicated a special dividend would be declared with the proceeds. Mondi noted the deal should close in H2 22E subject to various T’s & C’s. With total expected proceeds of EUR 1.8bn, this implies an EV/EBITDA of 5.4x (FY 21A). We highlight Sylvamo’s recent confirmed exit from Russia (c.710ktpa of total capacity: 60% was UWF). Sylvamo first indicated that they intended to exit Russia in May, with this successfully achieved on 6 October. Final selling price was USD 420mn but net of fees and FX this equated to USD 390mn. Based on FY 21A adjusted EBITDA of USD 148mn (FY 20A: 122mn & FY 19A: 164mn), this equates to an EV/EBITDA of 2.6x. We note however that prior to the decision to exit Russia, the company planned to invest USD 220mn in a new recovery boiler funded from Russian cash flows. If we adjust the net proceeds for this, this implies a FY 21A EV/EBITDA of 4.1x.
  • Recent peer read-through: DS Smith recent H1 23E trading statement (May-Oct 22) guided for adjusted EBIT to be at least GBP 400mn (+45% y/y) driven by strong revenue growth, cost control, despite lower like for like corrugated box volume. Based on FY D&A guidance, we estimate adjusted EBITDA will be up at least 27% y/y to GBP 623mn. Overall performance for FY 23E is now expected to be ahead of their previous expectations. DS Smith is currently trading on 1-yr roll EV/EBITDA of 4.9x, similar to Mondi and Smurfit Kappa.
  • Balance sheet continues to have significant optionality: Our base case implies a net debt/EBITDA of 0.4x at the end of FY 22E. Despite Mondi’s plans to exit Russia, Mondi has confirmed substantial CapEx plans. Their pipeline currently includes c.EUR 1bn of expansionary projects already approved or under advanced evaluation, which they anticipate will generate mid-teen returns when in full operation (CRe: at least an incremental EUR 125mn pa in EBITDA). Mondi’s CapEx is expected to be c.EUR 500-600mn in FY 22E and c.EUR 750-850mn in FY 23E. FID for a new kraft paper machine (200ktpa) at its Steti mill is expected to take place in H2 22E. Deal to acquire CM mill from Burgo to convert to testliner is also set to be concluded in H2 22E.
  • Sector valuations remain depressed: All peers are trading at a discount to their 5-yr historic forward EV/EBITDA (x). Mondi’s discount is c.30%, in line with DS Smith (-32%) and Smurfit Kappa (-30%). UPM has held up the best (-7%), while Sappi has fared the worst (-39%).
  • We value Mondi excluding earnings from Russia: Using a SoTP EV/EBITDA (x), we set a TP of ZAR 358/share (GBP 17.68). This implies Mondi is trading on a 1-yr rolled EV/EBITDA of 4.9x, a 30% discount to its 5-yr average forward. Including a 1-yr rolled dividend yield of 6%, this implies a total 1-yr expected return of 35%.
  • Conference call details: Friday 14 October at 9am – Register

Download Report