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There is an old saying that “market bottoms are an event and market tops are a process”.
The adage implies that markets very rarely collapse or crash, instead forming a series of lower highs as faith is gradually lost, a lofty valuation proves unsustainable and stale bulls finally capitulate.
By contrast, the argument goes that the low for an asset’s price is a one-off, from which it forges a sustained (if potentially gradual) recovery. Paper and packaging giant Mondi could just be an example of a share where a low is evident.
Mondi is another example of how a perceived lockdown winner became a share price loser once Covid-19 retreated and consumers emerged from their incarceration.
Investors snapped up paper and packaging companies as a play on the boom in e-commerce stoked by lockdowns as consumers ordered goods online and had them delivered.
Corrugated packaging and cardboard boxes represent about a third of the business but flexible packaging, bags and pouches for food and drink and fast-moving consumer goods (FCMG) are the core of the company, at just over half of sales, while the rest comes from uncoated fine paper.
After the packaging boom in lockdown came the bust. The world reopened, higher oil prices drove up energy costs, higher interest rates dampened demand for consumer goods (and increased interest bills on debt) and customers destocked in anticipation of further price cuts.
A need to extricate itself from Russia and sell assets was a further complication for the company, which first joined the London and Johannesburg stock exchanges when it was spun out of Anglo American back in 2007.
Analysts already think Mondi’s pre-tax profit could halve in 2023, from last year’s €1.6bn, and further price cuts could yet render even those forecasts optimistic, as could a fresh surge in crude oil, which is trading at its year-highs around $90 a barrel.
But the destocking will end at some stage and there are signs that the paper and packaging industry is responding to the tougher times.
Rivals are closing uneconomic plants and Smurfit Kappa (SKG) is exploring a merger with America’s Westrock. Such consolidation often helps to form the bottom of the cycle in the paper and packaging industry.
The sharp share price falls suffered by Mondi already price in a good deal of bad news.
Mondi’s £6.3bn market cap compares to £5.3 billion of shareholders’ funds, for price-to-book value multiple of barely 1.2 times, which feels low for a business with a strong record of generating both cash and returns on capital employed in the mid-to-high teens.
At the first-half stage, Mondi possessed plant, equipment, and inventory worth £4.7bn to again give some solid backing to the balance sheet. While there is a £1.1bn net debt pile, that still represents barely a fifth of shareholders’ funds, so financial gearing is low, and that interest cover is good.
Analysts expect a cut in the annual dividend, but the yield still exceeds 4pc, so patient investors are being paid to hold the shares while they await a turn in the cycle.
The next trading update, for the third quarter of the year, is due on Oct 19.
Questor says: buy
Ticker: MNDI
Share price at close: £13.06
Update: Yellow Cake
Even after doubling our money in three years, at least on paper, we could continue to get high-powered returns from Yellow Cake.
The feedback from last week’s World Nuclear Symposium, held in London, feels bullish, which is perhaps not surprising as the price of uranium breaks through $60 a pound and heads toward spring 2022’s peak of $64.
A military coup in Niger and a warning about production problems at Cameco’s Cigar Lake Mine in Canada both have utilities on alert, as they fret about future supply and whether there will be enough material to go around to meet ambitious plans for new nuclear facilities, especially as no one has invested in new uranium supply for over a decade, thanks to the accident at Fukushima in Japan in 2011.
This could leave Yellow Cake in clover. In its specialist warehouses, the firm holds more than 20 million pounds of U₃O₈, a fine powder that is ultimately processed in refineries to prepare it for use as fuel in nuclear reactors.
Yellow Cake has an option to add to its holdings through purchases from Kazakhstan’s Kazatomprom and it funds these deals through equity placings.
The prospect of another capital raising may put a lid on the shares in the very near term, but further upward moves in uranium prices could provide a powerful long-term tailwind.
Questor says: buy
Ticker: YCA
Share price at close: 486.2p
Russ Mould is investment director at AJ Bell, the stockbroker
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