Shares in the company are down 7.8% to £19.25 on the downbeat outlook.
Mondi says underlying operating profit was up 8% at €245m in the quarter to 30 September thanks to higher selling prices. Like-for-like sales volumes also rose, driven by good growth in containerboard and fibre packaging products.
However, the improved profitability was partially offset by higher prices and the impact of foreign exchange. Costs for wood, energy and chemicals were 15% higher compared to the third quarter of last year.
EARNINGS EXPECTIONS CUT
UBS analyst Mark Fielding has cut his underlying earnings before interest and tax by 2.7% to €1,016m in the year to 31 December 2017, half of which reflects currency movements in the first half.
He has also trimmed estimated earnings before interest, tax and amortisation by 4% in 2018, ‘reflecting the lower base, further currency impact and cost inflation, as well as limited incremental price momentum.’
Despite the downgrade in earnings, Fielding is optimistic on the stock beyond the immediate future given Mondi’s medium-term fundamental outlook for volumes and its underlying 7% to 9% free cash flow to support dividends.
CAN MONDI RECOVER FROM HIGHER COSTS?
Davy Research analyst Barry Dixon believes the headwinds at Mondi are likely to result in a 2% to 3% reduction in the broker’s forecasts.
‘The issue facing the industry now is whether, given the strong demand fundamental, it has the capacity to recover cost increases’ says Dixon.
He is confident that Mondi can achieve this but expects it will put margins under pressure in the short term.
The analyst expects some relief in the fourth quarter for raw material costs for old corrugated containers, but this is expected to be short term as prices are expected to subsquently rise on Chinese demand.