Deutsche Bank upgrades Mondi to 'buy', valuation "way below" DS Smith

With the company's leverage declining towards 1.0% by year-end, management was studying boosting cash returns to shareholders in 2018, they said.

An estimated €1.5bn of earnings before interest, taxes, depreciation and amortisation in 2018 and more expensive acquisition targets due to the stockmarket cycle meant the group had a theoretical €2.0bn or more of margin of firepower to funnel towards special dividends.

However, Deutsche Bank believed Mondi would only pay-out €750m in special dividends, on top of its regular €300m in dividends, in order to retain a conservative profile and financial leeway.

Even so, the projected dividends would equate to roughly 10% of the group's market capitalisation, Deutsche pointed out.

In terms of recent industry dynamics, the broker pointed out price hikes from suppliers of kraftliner and testliner, price increases for UWF paper in the States on the back of pulp price inflation and recovering demand for cement, with the latter boding well for a recovery in bag prices.

Valuation-wise, the recent correction in the stock had left it trading at 7.7 times' Deutsche's estimate of its 2018 EV/EBITDA multiple, which was now "way below" DS Smith's at 9.0 times.

On the back of all of the above, Deutsche upgraded its recommendation for the shares from a 'hold' to a 'buy', albeit while leaving its target price unchanged at 2,150p.