- Mondi shares buck negative trend on bullish research note
- Sector down 30% to 40% since last cyclical peak
- Consensus estimates too cautious for 2024
Shares in paper and packaging company Mondi (MNDI) were bucking the downdraft in UK shares on Thursday following a bullish report from Morgan Stanley, which has made the company its top pick in the sector.
UK shares were down more than 1.2% pressured by hawkish comments from the US Federal Reserve and UK two-year bond yields spiking above 5.5%, surpassing the highs during the meltdown in September 2022 after the disastrous mini budget.
In early trading Mondi shares were up 0.7% to £12.33, while peers Smurfit Kappa (SKG) and DS Smith (SMDS) were down 0.6% and 0.2% respectively, outperforming the wider market.
TROUGH EARNINGS
Morgan Stanley argues the sector is close to an earnings trough in the wake of several plant closures, which have historically been a good indicator of turning points in the cycle.
While admitting it may be too early to call a cyclical inflection point, the investment bank believes it is better to be early than late because balance sheets across the sector are in good shape and any signs of ‘green shoots’ post-summer could see shares moving higher ‘very quickly’.
European pulp and paper equities were down 10% in June and have fallen 30% since the last cyclical peak. Meanwhile, Mondi shares are around 40% below the peak in September 2021, which is in line with losses at DS Smith and Smurfit Kappa. The falls reflect a 40% drop in consensus earnings estimates according to Refinitiv data.
Morgan Stanley believes now is an attractive entry point for the sector.
The bank maintains an overweight on Mondi for its anticipated earnings growth into 2024 where it believes consensus estimates are too conservative.
All stocks in the sector trade below long-term price to book ratios and towards the bottom end of their historical trading bands indicating investors have already priced in a downturn.
RISKS REMAIN
While expecting pulp prices to stop falling and to begin a new up-cycle, the investment bank doesn’t believe the fundamentals are in place for a snap-back in prices.
Reasons include high inventories and strong growth in supply, which is expected to increase 3% in 2023 and 4% in 2024, well above the long-term growth in demand which has averaged 1.7% growth.
