This is a report written to provide investment advice to a client if Mondi plc is a suitable firm to be invested to meet the investment objectives specified by the clients. The three investment objectives include: (a) to invest in firm with a track record of sustainability, (b) the firm should be ethically sound, and (c) the clients is interested in capital growth (i.e., to be derived from capital gain due to the above average growth rate of the profitability of the company invested in). In order to investigate if the target firm is the correct choice, a study on the company background will be performed. Then, the profitability of the firm will be studied. Financial profitability ratios will also be calculated if the firm has a track record of sustainable earnings and to judge if the management team in the target firm is competent.
Founded in 1967, and is headquartered in Addlestone, United Kingdom, Mondi plc is a famous international paper and packaging company around the world. According to the information on the corporate website at www.mondigroup.com, the company is mainly involved in manufacturing and production of uncoated fine paper (UFP), packaging paper, converted packaging products, and other paper-related specialty products. Apart from the main business, the company is also providing application engineering services (which include both pre-sales and post-sales technical consultancy and technical training) to the customers. The company is categorized under the paper and paper products industry. The company has a diversified and broad customer base. The customers comes from various industry, which include: automotive; building; construction; chemicals; farming; agriculture; food; industrial; medical; pharmaceutical; and hygiene industries. At the year of 2010, the company is approximately having a total of 28,800 employees (Annual Report 2010).
In order to understand the profitability picture of Mondi plc, another firm operating in the paper and paper product industry will be used for comparison purposes. For this, De La Rue is selected as the peer for comparison purposes. However, it is aware that both the company may not subject to direct comparisons as De La Rue is more involve in paper money printing and security related businesses.
In order to perform comparisons on the profitability of Mondi to the peer, three profitability financial ratios are selected. They are: gross profit ratio, net profit ratio and return on capital employed. The exact calculation of these ratios for Mondi and De La Rue are shown in Appendixes at the end of this report. However, the details of the ratios calculated are shown in Table below.
As shown from Table 1 above, it can be observed that the gross profit margin of Mondi is relatively stable, ranging from 38% to 41%, between the year 2007 to 2010. Such a high gross profit margin indicates that the company does possess certain competitive advantage in the industry. In a truly competitive industry structure, such a margin is simply not possible. However, a review of the gross profit margin of De La Rue indicates that the gross profit margin is highly turbulent. This indicates that the business of De La Rue is more volatile and cyclical in nature. Compared to De La Rue, Mondi is a much more stable business. This is one of the characteristics of good investment as the profitability of the business can be predicted with greater degree of confident and reliability.
Although the gross profit margin of Mondi is relatively high, the net profit margin of Mondi is not attractive at all. From year 2007 to 2010, the net profit margin of Mondi range from 0.23% to approximately 5%. Such a low level of net profit margin indicates that the company has very high overhead expenses. Compared to the peer, it is found that the net profit margin of De La Rue, although volatile, is constantly above 10% in the year 2007 to 2010. Overall, the analysis of net profit margin indicates that Mondi is not a profitable business to be invested in.
Return on capital employed is a useful ration to investigate if the management is able to efficiently using the capital available to generate returns for shareholders. Again, the ROCE ratios for Mondi are not satisfactory, as compared to the peer, namely De La Rue.
In Figure below, the stock prices of Mondi for the past 5 years. It can be seen that the stock prices drop significantly during the years of financial crises in 2009. It may be hard to blame the management because such a situation is affecting most of the businesses around the world, particularly among firms in US and Europe. Other than that, the share prices had recovered sharply after the crises, as the business seemingly return to better profitability in the year 2010.
Source: Yahoo Finance
It is understood that the client has several interests in mind before making the investment, namely: (a) the to be invested firm should have a track record of sustainability, (b) it is ethically sound, and (c) the clients is interested in capital growth (i.e., to be derived from capital gain due to the above average growth rate of the profitability of the company invested in).
Mondi indeed successfully fulfill several requirements of the clients. For example, the company has a good track record of sustainability. The company even published several sustainability related report in its annual report. Besides, it is found that the management is ethical as well. The nature of the business, involve in proper and ethical business dealings – paper and paper related industry. The company never involved in unethical industry such as gambling, smoking or drinking. However, the company is not that company that can reasonably provide growth potential to the capital invested in the firm. This is because the company had already recovered from recessionary period, and the share price is already fairly valued. Investors no longer able to buy the stock cheap due to crowd psychology during market panic as in the period of 2008 – 2009. Thus, overall, Mondi is not a suitable company to be recommended to the client because the company does not able to fulfill the requirement to have reasonable chances to provide capital growth for the client.
Anthony, R. N., Hawkins, D. F., and Merchant, K. A. (1999). Accounting: Text and Cases, 10th international edition, McGraw-Hill.
Horngen, H. and Izan, B. F. (1997). Accounting, 2/e, Prentice Hall.
Libby. R, Libby. P and Short. D, (2001), Financial Accounting, The McGraw-Hill Companies, Inc.
Reilly, F. K. and Brown, K. C. (2003). Investment Analysis and Portfolio Management (7th edition). International Thomson Publishing.
Silbiger, S. (2005). The 10-day MBA: a step-by-step guide to mastering the skills taught in top business schools. Piatkus.
Weetman. P, (2006), Management Accounting, published by Pearson Education Limited.
Wild, J. J. (2000). Financial Accounting-Information for decision, McGraw-Hill