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It’s been a brilliant year for the FTSE 100, but investors in this UK share have missed out on the fun. While the blue-chip index has climbed 23.35% over the last year, but paper and packaging specialist Mondi (LSE: MNDI) plunged 30%.
I did consider buying Mondi a year ago but decided to hold fire. I’m very glad I did. So is it a more tempting proposition today?
FTSE 100 underperformer
I tend to avoid chasing winners because I fear I’ll arrive at the party just as the fun stops. Gold miner Fresnillo, for example, has rocketed 240% in the last year but I wouldn’t touch it today. It looks hugely expensive on a price-to-earnings ratio of 83, way above the FTSE 100 average of about 18. Typically, I favour quality companies that have fallen out of favour but look priced for a recovery.
That’s why Mondi catches my eye. It looks dirt-cheap, with a P/E of just 11.3. The trailing dividend yield has jumped to 7%, among the highest on the index. But shares rarely slump without reason, and times are tough for Mondi.
Full-year 2024 revenue edged up just 1.2% to €7,416m, but net income plunged 57% to €218m. Profit margins tightened, earnings per share more than halved and return on capital employed slumped too.
Bargain valuation, big yield
This year hasn’t been much kinder. In October, Mondi reported third-quarter earnings of €223m, down from €274m in the previous quarter and €290m in the one before that. The company warned that conditions would remain challenging for the rest of the year, with prices and demand still falling and key markets in oversupply. Investors didn’t like that one bit. The shares tumbled 16% in a day.
The business is cutting costs, delaying investment in a new paper machine at its Canadian pulp mill, and focusing on efficiency. But packaging firms are tied to global demand and typically cyclical. When economies slow, spending falls and packaging orders follow. Mondi operates in 30 countries, so it can’t hide from that slowdown. This is a sector-wide issue. Rival Smurfit Kappa Group is down 30% over the last year too.
The upside is that when demand recovers, profits can rise just as quickly. And the forecasts look positive.
Watching for a turnaround
Consensus analyst one-year share price forecast average out at 847p. If this came through, it would deliver a potential rise of more than 30% from today. However, some of those forecasts may pre-date the recent slump, so should be treated with caution. Yet of 15 analysts covering the stock in the last three months, eight rate it a Strong Buy.
Mondi isn’t out of the woods. It held last year’s dividend at 70 euro cents, but Barclays recently trimmed its forecast to 46 cents for 2025 and 2026. The shares could take another hit if that happens. Although given the lower share price, the shares are still forecast to yield around 6%.
Investors might consider buying now, but only with patience and a long-term view. I’ve been caught before by jumping in too soon after weak results, only to see the shares fall further. For now, I’ll stay on the sidelines and keep watching closely. I expect Mondi to recover, but I suspect it’ll take time.
