Mondi plc (MNP ZA)

Jul 31, 2022 | Stock Picks

SUMMARY

Position:                                               LONG

Upside target:                                 R355.00

Recommended stop-loss:           R277.00

 

Recommendation:                         BUY

Analysts:

Peet Serfontein, Thabiso Mamathuba

 

Mondi is an international paper and packaging group, with production operations in over 30 countries.  The group’s key operations are in central Europe and South Africa.  The board has recently decided to divest the group’s Russian assets.

Mondi tends to be resilient to economic cyclicality through its focus on corrugated boxes, which are primarily used in defensive sectors such as food and beverages.  The company is viewed as a core portfolio holding.

Technically, a price action that remains in a sideways channel pattern makes the share attractive as an investment opportunity (see the black parallel trendlines on the main chart as well as the insert).

A sideways or horizontal channel pattern is a chart pattern formed from two parallel trend lines drawn above and below the resistance and support levels.  This pattern is characterised as having equal highs and lows.  If prices remain reasonably constant for some time, the slope will appear horizontal, and a sideways channel pattern will be formed.  The expectation is for the price action to progress upwards from the lower range of this pattern.

Furthermore, according to Heikin-Ashi charting technique, a bullish trend has commenced. This might support the share in further upside price potential.

 

Technical analysis

The lower panel shows the Moving Average Convergence Divergence (MACD) indicator, which is a lagging indicator that falls under both the trend and momentum indicator types.  A recent bullish crossover occurred when the MACD amber line crossed above the MACD black line.  Such a scenario confirmed a change in trend and represented a buying signal (see the black arrow).

According to the RSI (Relative Strength Index), the price seems to be overbought at R430.00.  This classifies our profit targets of R355.00 as realistic.  The RSI is regarded to be in oversold territory when the reading is below 30 and regarded as overbought when the reading is above 70.  The current reading of the RSI is at 48, leaving significant room for further upside price potential.

The entry range is between R288.00 to R310.00. Our upside target is set at R355.00 (+18.7% upside potential from current levels). Time to exit is end of August 2022 (taking a medium-term stance).

A price below R277.00 (-7.4% from current levels) remains a major concern for downside potential and is recommended as a stop-loss.  This level is close to the lower range of the sideways channel pattern.

Expect some high volatility in the price action going forward.

 

Long-term fundamental view

Mondi owns both upstream and downstream production assets (vertically integrated operations), providing a high degree of self-sufficiency and improved security of supply.  The company operates in low-cost regions with access to low-cost wood.

We believe the sector is more defensive than other resource companies since paper prices are less volatile than metal or soft commodity prices.

Mondi’s financial performance has been strong with a solid pipeline providing further support.  The company enjoys an attractive ROE and ROA, as well as persistency in earnings.

European and Chinese regulatory changes are supportive for Mondi as they favour virgin paper.

The company reported a solid first quarter performance, with EBITDA growth tracking ahead of market expectations as positive momentum in volume growth and price increases filtered through.

The price increases implemented in 2021 and 2022 should offset any expected increases in the cost base at group level, which is positive, while shorter planned maintenance should bode well for the counter in FY22.

The macroeconomic outlook continues to be uncertain, but the company believes it is well positioned for when the recovery takes place.

Downside risks to our fundamental view include a longer-than-expected slowdown in global growth, a stronger-than-expected rand exchange rate, and prolonged weakness in the paper market.