We’ve all heard the saying “money doesn’t grow on trees”, perhaps from our parents shortly after asking for a handout. As we get older we realise that our parents were right about most things, but we just didn’t realise it until we became parents ourselves. But for once, I think they may have got it wrong.
Turning trees into €6.7bn
Believe it or not, there is a London-listed company that not only grows trees, but turns them into over 100 products to generate around €6.7bn of revenue each year. International paper and packaging group Mondi (LSE: MNDI) is involved in every stage of the process, from managing forests and producing pulp, paper and compound plastics, to developing effective and innovative industrial and consumer packaging solutions.
What many people will perhaps find even more surprising is that Mondi is actually a blue-chip FTSE 100 company. One that rubs shoulders with the likes of BP, Vodafone and HSBC. In fact, many leading brands around the world rely on its innovative technologies and products across a variety of industries and in all walks of life.
Online shopping boom
The group, based in Addlestone, Surrey, recently announced its final results for 2016 with yet another strong performance, building on its track record of improving profitability over the last five years. Underlying operating profit increased 3% to €981m, despite lower revenues of €6.7bn, a 2% decline from the previous year.
I believe the long-term outlook for the business remains positive, with demand for consumer packaging rapidly increasing as a result of the boom in online shopping. From a valuation perspective the shares are currently trading at all-time highs with a 43% gain in the past year alone. The current P/E rating is slightly higher than its five-year average, and I would suggest investors wait for a pull-back and buy on weakness.
Providing essentials
Another lesser-known FTSE 100 company that also dabbles in packaging is Bunzl (LSE: BNZL). The international distribution and outsourcing group has seen its shares rally in recent months recording a 15% gain since November. I remain bullish on the company’s long-term prospects, but are the shares still good value after recent gains?
Bunzl is a relatively defensive business, distributing a wide variety of products that are essential for its customers in the successful running of their businesses. These include food packaging, hygienic clothing, paper and plastic disposables. The company has a proven strategy of boosting revenue via acquisitions, and this strategy continues to work well, leading to strong share price performance and improving dividends.
But I’m a little concerned about the valuation. Earnings are expected to grow by 4% this year, with a further 5% increase in 2018, leaving the shares trading on a slightly expensive P/E rating of 20. I think a sharp retracement could be imminent, which could perhaps provide a better entry point.
