Share of the week: Mighty Mondi motors

We live in an increasingly paperless world, but packaging remains big business and South African firm Mondi is thriving. Supported by growth in Russia and lower costs, the company this week reported record earnings, triggering upgrades across the City. The shares had already tripled in the past five years, and after another surge on these results currently sit at an all-time high.

Mondi's share price had fallen 4% in the first two days of this week, largely tracking the wider market lower on fears around Greece, China and a bond market sell-off. However, Mondi's first-quarter trading update whipped up a buying frenzy Wednesday, and investors chased the shares up as much as 13% higher to 1,471p, leaving the shares up almost 8% on the week.

And, according to the relative strength index (RSI (see chart), the shares are currently not overbought.

Operating profit jumped by 29% to €236 million in the three months to 31 March, thanks to higher sales volumes, the successful integration of acquisitions and higher selling prices in Russia and South Africa. In a conference call, management said over half of profit growth was driven by capex and M&A. Costs in Europe were low and land sales helped offset weaker demand in South Africa.

Recycled containerboard prices were 6% lower in the period, but a planned €40/tonne boost to prices is expected in the year. This should add €30 million to group cash profit and operating profit, reckons Barry Dixon, an analyst at Davy Research.

As scheduled, Mondi's Richards Bay mill was shut for maintenance in the period and the Polish Swiecie mill will follow in the second quarter. In all, planned maintenance is likely to cost the firm €80 million in lost business.

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Broker UBS reckons management will be able to maintain this strength going forward and have upgraded earnings forecasts. Although Mondi is likely to battle rising input costs, higher maintenance costs and a lower contribution from Russia, UBS analysts have upgraded 2015 earnings estimates by 5% to €1.27, which is 8% above consensus. Look for full-year operating profit of €910 million.

Justin Jordan at house broker Jefferies has upped his price target to 1,525p, citing the group's financial flexibility for capex, accretive M&A and returning money to shareholders while trading at a discount to peers. Since listing, the packaging company has delivered 20% compound annual growth rate (CAGR) to EPS and is targeting sector-leading 13% return on capital invested in the period.

Mondi is Bank of America Merrill Lynch's top pick in the European paper & packaging sector.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.