SIKI MGABADELI: Time now for our feature “Back to the Future” and we focus on paper and pulp producer Mondi. The group started way back in 1967 in South Africa when its former owner, Anglo American, built the Merebank Mill. Following more than two decades of growth in South Africa and consolidation the group expanded to Europe through acquisition in the 1990s after it demerged from Anglo American. So is there an investment case for Mondi?
Let’s ask Rhynhardt Roodt, who is portfolio manager at Investec Asset Management. Rhynhardt, thanks for your time today. Quite a long history for this business.
RHYNHARDT ROODT: Ja, it is certainly so. The group does go back a long way, as you said, way back to 1967. They’ve kind of survived many decades in what is actually quite a cyclical industry by following a very focused growth strategy by consolidating some of the key markets, like South Africa.
Then they went on subsequently and they obviously rapidly expanded in kind of many different regions, in countries like Austria, the UK, France and Russia to name but a few.
And then the group became really an independent dual-listed business in 2007 when they successfully demerged from Anglo American. And obviously as we know today they’ve got listings on the London as well as the Johannesburg stock exchanges.
And it’s quite ironic that since the demerger from Anglo American the Mondi share price has done significantly better, it goes without saying, than the Anglo American share price.
SIKI MGABADELI: Absolutely. So let’s talk about where it is today, how it looks. We know that there was that major rationalisation in the pulp and paper industry between 2008 and 2010. How did Mondi weather that?
RHYNHARDT ROODT: If you look at the group at the moment, if you look at the group’s revenues, Mondi sells about half of its products into developed markets and then the balance into emerging markets. So it’s a fairly well-balanced business. We would say about 60% of the profits of the group would emanate from emerging regions. By far the biggest source would come from emerging Europe, followed by the likes of Russia and to a lesser extent then South Africa.
And it’s really in a strong position across various categories. It’s a top global producer of sacks, which are heavily used in industries like the cement industry, and it’s certainly also one of the global leaders in the production of copy paper. So it’s a very well diversified, well-rounded group across various reaches.
SIKI MGABADELI: Is that where its strength lies, would you say?
RHYNHARDT ROODT: Ja, that is one, and the fact that it’s quite well diversified. But to me really its strength is that we would classify Mondi as a low-cost manufacturer across the product range, and it also has a very high level of vertical integration across its key grades.
Now, if you add those two factors together, then if you look at the cyclicality of the group, it’s actually less cyclical than you would think for a business of this nature. So it’s quite defensive.
And then the group’s management team is exceptionally highly regarded. They really have been delivering very solid results. Their returns on mush, on bark, are well above their cost of capital, much stronger than those of the global peer group. And it’s still a fairly young team. Management has certainly remained quite consistent through time.
And it’s exposed to the right areas. It has a nice exposure to higher-growth emerging markets. And if you look at the issue of success of the group, they’ve kind of achieved it via quite a low-risk organic expansion, which is also quite a nice thing.
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