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    Mondi Ltd - What is the future of paper?

    History and Structure

    Mondi is an international packaging and paper Group, listed on both the Johannesburg and London stock exchanges. The company employs more than 26,000 workers and runs production operations across 29 countries, with key interests in South Africa, central Europe, Russia and other emerging markets. The company is truly integrated across the production chain, from forestry right through to the manufacture of pulp, paper, corrugated packaging, industrial bags and newsprint.

    Mondi started off as a division of Anglo American when the Merebank Mill was built in 1967. After expanding throughout South Africa, the company set its sights on Europe in the early 1990’s and started a long process of expansion through acquisition. From 2004 to 2007 the global paper and packaging industry suffered from production overcapacity and slow demand growth, and Anglo decided to unbundle Mondi, which listed separately in July 2007. Given its tough operating environment, the company decided to streamline its structure once again for the sake of cost control.

    Source: www.mondigroup.com

    Financial Results

    Mondi has recently released their results for the year ended 31 December 2012, and has managed to recover admirably from a disappointing first quarter. The company has reported improved volumes and pricing after Q1, as well as strong cash generation from operations of €845 million.

    The group achieved a ROCE (Return on Capital Employed) of 13.7%, which exceeded the Group’s through-the-cycle target of 13%, but fell short of the 15% ROCE achieved in 2011. Earnings per share dropped 3% from 71.8 € cents in 2011 to 69.6 cents in 2012, but management were able to raise the total dividend for the year by 8% from 26 € cents in 2011 to 28 cents in 2012.

    Group revenue increased by 1.2% to € 5,807 million, while underlying EBITDA (Earnings before interest, taxes, depreciation and amortization) decreased from 16.8% to 15.9%, and under-lying operating profit decreased from 10.8% to 9.8%. When analysing the development of underlying profit from 2011 to 2012, it is clear that management’s cost reduction, volume improvements and acquisitions and disposals has contributed positively. The sole detractor from operating profit was net negative price variances.

    Source: www.mondigroup.com

    Capital Allocation

    Mondi has spent €1.2 billion on acquisitions as part of their initiative to increase exposure to the higher growth packaging segments of the market. As a result, the capital employed in packaging businesses has risen from 57% to 67% of the Group’s total. The company is also very well positioned to take advantage of growth in emerging markets, with 50% of turnover already originating from those regions. Capital expenditure has dropped off from € 700 million in 2008 to € 307 million for 2012, with two major projects announced this year: the €128 million Ružomberok recovery boiler and the €70 million Štěti paper machine. Management expects excellent results in terms of IRR (internal rate of return) from both projects.

    Source: www.mondigroup.com

    Current Valuation and Future Prospects

    Mondi currently trades at a PE ratio of 17.29 and a dividend yield of 2.73%, and the share price has climbed 58% over the past 6 months. The company’s only rival in the local paper industry, Sappi, trades at a PE ratio of 34.05 and has not declared a dividend since late 2008. Sappi has struggled to remain profitable over the last years, but still remains a highly cash generative business. Both these companies benefit from the fact that the paper industry is very capital intensive and produce high barriers to entry, and also offers investors an effective rand hedge.

    Mondi’s future prospects hinges on its ability to shift its operations towards more profitable segments of the market, and to maintain its recent run of value adding acquisitions.

    Kind regards,

    Cor Van Deventer

    Sources: www.mondigroup.com

    021 914 4966

    Permalink2013-02-26, 09:14:13, by Mike Email , Leave a comment

    Betting on last year’s winner

    There is always a continuous search for excellent performing funds in which to invest. But can we just go by investing into previous year’s top performing fund? Is past performance and indication of future performance? Somewhere on most funds’ fact sheet the following is stated: “Past performance is not necessarily indicative of future results” or something to a similar affect.

    The table below shows the Top 10 performing General Equity funds over the last 5 years. The oldest share class was used and the fund needed to exist for the full calendar year to be included.

    Over the past 5 years 35 funds were at one point in the Top 10. 21 of those funds were only once in the Top 10, 13 funds were twice and only one fund appeared three times. The Foord Equity fund was the only fund that was in the Top 10 for three consecutive years, from 2010 to 2012.

    The question we then asked is should a fund appear in the Top 10, does it subsequently remain in the top quartile or does it drop to the lower quartiles? The table below indicated the quartile rankings of the Top 10 funds of 2008 over the following 4 years.

    The following year, only one fund was able to remain in the top quartile. Most of the funds dropped to the 3rd quartile. By 2012, 5 years later, half the funds that were in the Top 10 in 2008 were in the bottom quartile.

    If one is not able to predict the future winner from just past performance, how does an investor select a fund to invest into?
    Rather than focusing on which funds was at the top of a certain year more time needs to be taken to understand the investment philosophy and process of the manager. If this is understood a better judgement call can be made to invest into the fund.

    By understanding the investment process of the fund manager you would have a better understanding of which market conditions the fund will perform and underperform.

    Instead of only focusing on the top performing manager we also ascertain how consistent the fund manager’s performance is, aiming for a fund to be consecutively in the top two quartiles rather than the best performing fund over just one period.

    With the end of the financial year in sight, this is a friendly reminder to top up your retirement annuity.

    As always we are available for any questions.

    Kind regards

    Gerbrandt Kruger

    021 914 4966

    Permalink2013-02-19, 09:58:44, by Mike Email , Leave a comment

    Retirement Annuities are useless?

    “Retirement Annuity season” is upon us and many of you would have had calls from your financial advisor reminding you to top up your R/A contributions to the present maximum allowed amount of 15% of your annual non retirement funding income. Retirement Annuities have a bad reputation with a lot of clients and one of the things I hear most often as a Financial Advisor is that policies in general, but Retirement Annuities especially, are useless. People will tell you stories of their own, a family member or a friend who had invested in Retirement Annuities for years, but now has insufficient capital with which to retire. This is especially the case with those who are either self employed or work for smaller companies that do not have retirement funds.

    Without exception, in every case that I have analysed there is only one reason why a person’s Retirement Annuities are insufficient to provide for them in retirement. They simply did not contribute enough for long enough.

    Firstly, some people can’t retire on their Retirement Annuities because the contributions were hopelessly too small. I have had people complaining that they have contributed to their Retirement Annuity fund for thirty years and now there is insufficient capital for them to retire on. Whilst they may have contributed for thirty years, they were only investing say R150pm. This may have been reasonable 30 years back, but today on a salary of R50 000 it’s not even close to the 15% generally contributed to company provided funds.

    Another person was contributing R5 000pm of his R20 000 salary (way in excess of the usual 15%), but he had only been doing so in the last 5 years prior to retirement. Obviously he also has insufficient retirement capital.

    The third category of complaint is probably the most common. This is where people cancel their Retirement Annuity contracts quite soon after starting them. Like any contract there are always penalties for early cancellation (try getting out of a 5 year rental agreement, 6months into the rental). The important thing here is to make sure that any new Retirement Annuity taken out is within your normal budget. Also in order to minimise the impact of these high initial fees, clients should rather use R/A’s which are costed on an as and when basis.

    If you are aiming for an inflation protected income after retirement of 75% of your final salary, you need to save 15% of your monthly income from age 25 until age 60. Where the underlying portfolio of the Retirement Annuity achieves a return of inflation plus 4% then you will achieve your goal.

    Looking at periods in excess of 10 years, most Retirement Annuities manage to achieve the desired return of inflation plus 4%.

    Retirement Annuities definitely have their place and they should be part of everybody’s retirement planning. They should however be purchased within the framework of affordability on the one hand but with reasonable expectations on the other hand.

    Kind regards

    Barry Hugo

    021 914 4966

    Permalink2013-02-12, 14:07:09, by Mike Email , Leave a comment