File Photo: The Mondi paper factory in Merebank, Durban.

DURBAN - Mondi fell nearly 8% yesterday despite the group reporting that it anticipated underlying profits to rise 8% to 245million in the third quarter, up from 227m recorded during the similar period last year.

The shares declined 7.44% to close at R346.89 - down from Tuesday’s closing price of R376.53 - after the group said it expected full-year results to be slightly lower than the market’s expectations due to cost pressures and adverse currency moves. The group said it benefited from higher average selling prices which were partly offset by higher costs and negative currency effects during the period.

It said the underlying operating profit was in line with the second quarter of 2017, with the positive pricing momentum seen across most product segments offset by rising costs, negative currency effects and the usual seasonal downturn in Uncoated Fine Paper. “We remain confident of making progress for the year and expect a strong final quarter, supported by generally higher average selling prices and good growth. However, continuing cost pressures and negative currency impacts are expected to result in an underlying performance for the year modestly below market expectations,” the group said.

Mondi has operations in Russia, Turkey, South Africa, Poland and the US. It said currency pressures were driven mainly by a weaker US dollar and Turkish lira, which weighed on operating profit compared with the same period last year. Costs were generally higher than the comparable prior year period and the previous quarter.

“Wood, energy and chemical costs were higher than the comparable prior year period while benchmark paper for recycling prices were up 15percent compared to the third quarter of last year and 6percent higher sequentially,” the group said.

Like-for-like sales volumes rose above the comparable prior year period, driven by good growth in container board and fibre packaging.

Upward momentum

Selling prices for the group’s key paper grades were above those of both the comparable prior year period and the previous quarter as the upward momentum in pricing witnessed over the first half continued.

The group also had its credit rating upgraded by Moody’s during the period. Wayne McCurrie, a fund manager at Ashburton Investments, said the market reaction to the results was overdone. “Generally the underlying business units are doing reasonably well, with exception of consumer packaging, which suffered a special charge of 45m as a result of restructuring,” McCurrie said. “In the South African newsprint, the closed paper mill led to special charge of 15m and many business units are experiencing higher average selling prices.”

McCurrie said problems such as during the planned maintenance shutdown which resulted in negative operating profit effect of 90m in the second half of the year during the quarter had a marginal impact as the market anticipated anticipated them. “However, we must expect a strong fourth quarter growth with higher selling prices and good volume growth,” he said.