Thursday tips round-up: Mondi, SAB Miller

Specially corrugated cardboard is the place to be in the paper sector, thanks to the sheer scale of demand from the likes of online retailers such as Amazon.com. Shares of Mondi, which derives about 70% of its sales from packaging, leapt 10% after its latest results. First quarter operating profits surged 30% on steady demand for its wares across the globe, save South Africa. After pushing through higher prices the company benefitted from the strength in the US dollar and lower input costs, including for wood and recycled paper.

Significantly, the last crisis drove a lot of capacity – from its rivals – out of the market. However, even if its competitors decide to step back into the fray it could take them about three years to ramp up their operations. The recent merger between two of its US rivals, RockTenn and MeadWestvaco, may also help prop up pricing in the meantime. What happens then is anyone’s guess but in the meantime “it’s hard not to want to bag some of Mondi’s returns,” says The Financial Times’s Lex column.

Takeover speculation, or gossip, continues to swirl around SAB Miller. The latest reports point to a possible combined bid from Warren Buffet and 3G Capital, on the hand, and AB In Bev, on the other. The rumours have been around for years and have yet to pass the gossip stage. However, the only way to rationalise buying into a stock that is trading at 24 times earnings is if you give those rumours any credence.

Improved second half trading in Australia and China, as well as in Europe, buoyed its latest figures but were offset by a strong dollar – which lowers reported earnings. Ironically, that benefits investors who get their dividend pay-outs in sterling. Even so, such a multiple “can only be justified if you think that bid will emerge. If not, avoid,” says The Times’s Tempus.