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Mondi way too cheap, especially with the likelihood of a huge special dividend

The company is churning out cash and does not appear to be interested in a big acquisition at current prices
Cardboard packaging
Mondi is on a lower valuation than sector peer DS Smith

With a juicy, fat special dividend possibly on the way, shares in paper & packaging firm Mondi PLC (LON:MNDI) are too cheap, according to Deutsche Bank (DB).

Since the third quarter earnings miss in mid-October, the shares have retreated by more than a fifth, leaving the valuation significantly below its peers, argues DB, which has upgraded the stock from ‘hold’ to ‘buy’.

READ: Mondi warns on profits as currency fluctuations and rising costs take their toll

DB reckons that a €750mln special dividend could be on the way on top of the €300mln normal dividend, which is more than 10% of the market capitalisation (roughly €10.2bn) at the current share price and more than half of the upside implied by DB’s price target of 2,150p.

The shares rose 2.3% to 1,860p on the upgrade.

Having jotted a few figures down on the back of an envelope, Deutsche Bank reckons underlying earnings (EBITDA) should approach €1.5bn next year and with larger acquisition targets proving too costly for the company at this stage of the stock market cycle, it sees “theoretic firepower for special dividends at €2bn or more”.

The bank acknowledges that Mondi will find it tough to boost its 20% returns and that new sales momentum from capital projects will only start to accrue in 2019, but it still reckons 7.5% year-on-year growth in adjusted earnings per share is possible next year.

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Mondi Plc Timeline

July 28 2015

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