The Mondi share price crumples 14% after a disappointing trading update!

The Mondi (LSE:MNDI) share price proved today (6 October) that even FTSE 100 companies aren’t immune from large falls. By lunchtime, the packaging and paper group was worth around 14% less than when the market opened.

What’s going on?

Investors reacted badly to its latest trading update for the three months ended 30 September.

They didn’t seem to like the fact that, in terms of underlying EBITDA (earnings before interest, tax, depreciation and amortisation), it was the group’s worst quarter since the first three months of 2024.

The company described the market as “subdued” and said paper prices were weaker during the quarter. As a result, to preserve cash, the group extended the closure of some of its plants that had been shut for annual maintenance work.

A gloomy outlook

Looking ahead, the press release accompanying the results said: “Demand-side confidence remains fragile, key markets remain in oversupply and current selling prices are lower than third quarter average selling prices.”

This doesn’t sound good. No matter how big a company might be, falling demand and lower prices is an unfortunate combination.

And other than cutting costs — the company says it’s “intensified” its focus on operational efficiency — there’s not much it can do about things. It’s delayed its planned investment in a new sack kraft paper machine at its pulp mill in Hilton, Canada. But ultimately, it needs the market to pick up. And until it does, the share price is likely to struggle.

Getting cheaper

However, it’s sometimes the case that investors overreact to bad news. And in my opinion, today’s response is a good example of this.

The group’s market cap is now around 10% lower than its book value at 30 June. Today’s share price fall has also helped push an already impressive yield even higher. Based on amounts paid over the past 12 months, the stock’s presently offering a return of 6.8%. However, this could come under pressure if the disappointing trading performance continues.

On paper at least (excuse the pun), the group appears to offer good value. But its share price has been steadily declining since the pandemic. Higher energy and transport costs have dented profitability. And pulp prices have been in long-term decline.

However, the trend to more internet-based shopping means the demand for packaging is likely to rise for the foreseeable future. Also, the company’s keen to capitalise on a move towards more sustainable solutions.

In 2024, the group generated 53% of its revenue from flexible packaging (paper and films) and 30% from corrugated boxes and containerboard. The balance came from uncoated fine paper. Its product mix suggests a strong recovery is possible.

That’s because although today’s trading update was pretty gloomy, the long-term fundamentals of the packaging market appear strong. In addition, the group has a wide geographical footprint and appears to have its borrowings under control. Its above-average dividend is also attractive. On this basis, Mondi could be a stock for patient investors to consider.