Box clever, make a packet

In A digital world it is no mean feat for paper and pulp merchant Mondi to secure 10th position in this year's Top 100 Companies rankings, based on a compound annual growth rate of 41% for an investment in the company over the past five years.

As Famous Brands CEO Kevin Hedderwick is fond of saying, today's consumers are cash-rich but time-poor. This means they buy goods more frequently and in smaller volumes.

The result has been an opportunity for Mondi to fill the need for boxes and bags to package the growing number of purchases today's consumers are making.

But Mondi could not provide such stellar returns to shareholders if it wasn't winning market share.

Jefferies International equity analyst Justin Jordan said 91% of Mondi's profits come from outside South Africa.

"It's essentially a European company with a limited presence in America and 9% of its profits from South Africa. It's a play on European production, but what Mondi has done, to its credit, is gain market share in a recessionary environment.

"It is the third-largest box maker in Europe, and to put this in perspective, the top four box makers in the US have 71% market share. The top four in Europe have about 35% to 40%.

"It's extremely fragmented with a long tail of private, family-owned businesses in places like France, Germany and Italy - multi-generation companies that have been around for many years."

Those companies are falling prey to Mondi's well-managed and highly efficient corporate machinery. "They are slowly going bust," Jordan said.

Mondi has been very active in Poland - one of the few countries in Europe to avoid recession. "Poland makes up about a quarter of Mondi's European revenues and is a bright spot in its business."

Mondi has access to forests in Russia, Poland and elsewhere in Europe, but also has access to large tracts of land in South Africa - excellent tree-growing terrain.

Land claims have been a potential threat to its business, but analysts laud the way management has gone about settling claims and turning land claimants into feeder-farmers from whom Mondi rents access.

"It adds slightly to costs but not materially so," said Jordan.

Why not buy land in comparable environments? Brazil would be suitable, said Jordan, but its overheated market makes acquisitions there expensive.

"Typically you're having to pay about three times invested book value for businesses in Brazil, compared to perhaps one to 1.5 times in Europe or the US."

For this reason Mondi bought a bag-making and packaging business in the US in June this year.

"It will effectively add 3% or 4% revenue growth in the next year. Roughly three-quarters of the business is now in making boxes, bags or plastic packaging.

"That is an area that is growing typically at GDP or industrial production plus 1% or 2% per year. Packaging demand is outstripping general consumer buying," he said.

Mondi's advantage is a broad palette of vertically integrated services, from tree to box.

Duane Cable, Coronation Fund Managers' head of SA equity, said although Mondi had made no significant purchases of late, each acquisition was strategically sound.

"The US purchase wasn't material to the business, but it is return-enhancing and underlines management quality. The management team is incredibly disciplined when it comes to acquisitions.

"The last significant transaction of size was Nordenia, which got them involved in consumer packaging and their big customer is P&G.

"The potential is there for P&G to roll out consumer packaging - specifically for diapers in China - in the longer term that provides an exciting growth platform."

Jordan agreed that Mondi under CEO David Hathorn has always argued it can achieve better returns on capital employed by investing in its existing footprint and then doing modest bolt-on acquisitions.

So what of the future? Europe's macroeconomic environment continues to be an issue, but the analysts seem convinced Mondi can continue its momentum - whether its market improves or becomes more difficult.

"They think and plan on a very long-term basis and that gives me quite a lot of confidence they'll continue to outperform their market.

"I am certain they'll continue to gain market share and organically add bits and pieces, make bolt-on acquisitions in Europe, in North America and in the Asia-Pacific region. It's a long-term chess game rather than a short-term quick win," said Jordan.

"Mondi has made good returns while the rest of the industry struggled. It's difficult for anyone to replicate its low-cost asset base.

"Mondi will continue to take share and, to simplify the analysis, if the market deteriorates it's clear some casualties in the market will occur, and Mondi will take share. They should really be the last man standing," said Cable.