FTSE 100 paper and packaging company Mondi (LSE: MNDI) delivered the market a pleasing set of full-year results on Thursday, with underlying profit up 3% compared to a year ago, cash from operations 10% higher and net debt down almost 8%.
The firm’s return on capital employed runs just over 20% and the directors hiked the dividend by 10%. It’s hard for me to look at the headline figures and see something I don’t like, which is a happy state of affairs Mondi shareholders have become used to over recent years.
Quality and operational momentum
I’ve held some Mondi shares for a while and I’m not holding them just because the share price keeps rising (honest!).
Solid operational momentum and a modest-looking valuation back Mondi’s share-price progress. At today’s 1,893p, you can pick up Mondi shares on a forward price-to-earnings (P/E) ratio of 14.5 for 2018 and the forward dividend yield runs around 2.9%. City analysts following the firm think earnings will cover the payout 2.4 times. Given the firm’s consistent progress, I don’t consider this to be an over-valuation.
Mondi’s chief executive David Hathorn gives us an insight into how the firm keeps driving operational progress. A capital investment programme powers growth, delivering incremental operating profit of around €50m in 2016 from recently completed capital projects. The directors anticipate a further €30m during 2017. On top of organic advances, Mondi completed four acquisitions totalling €185m in 2016, enhancing the product offering and geographic reach for the firm’s corrugated and consumer packaging businesses.
The outlook is positive. Based on today’s update I’m happy to continue holding my shares and would probably buy if I didn’t already have some.
Trading well but…
Fellow FTSE 100 constituent Intu Properties’ (LSE: INTU) shares are up around 6% as I write on the release of today’s full-year results, but I won’t be buying any.
The company owns and manages shopping centres in the United Kingdom and Spain. Trading has been good and highlights include a 5.6% lift in earning per share compared to a year ago and the directors have pushed up the dividend by 2.2%. However, net external debt ballooned by 5.4%, the firm’s net asset value remained flat and the debt-to-assets ratio crept up 1.4%.
There’s no doubt that retail-focused property companies operate in a highly cyclical sector and there’s some evidence that longer-term headwinds exist for bricks-and-mortar retailing full stop. Intu says that during 2017 the environment for business is likely to be challenging as the full impact emerges of the UK’s EU referendum vote, yet it hopes that by concentrating on top-quality assets in prime locations with high occupancy rates it can continue to prosper going forward.
With the economic cycle as mature as it is now, though, I don’t wish for exposure to retail property so will avoid Intu’s shares. To me, the downside potential looks too great for the stock. Even though the company will no doubt do its best to grow and keep its properties full, any future downturn in the economy could have catastrophic effects on earnings, asset values and the share price. Stocks like these are best bought when they are on their knees, in my view, and that’s not now.