BROKERS’ NOTES: Buy Mondi, take profit from Reits

Chantal Marx, head of investment research and content at FNB Wealth & Investments

Buy: Mondi

Mondi’s share price is down 14% year to date and the stock has moved sideways when accounting for dividends (including a special dividend paid in January). In the first half of its 2024 financial year Mondi experienced ongoing pressures on the bottom line, but it was not as severe as the market had expected. Importantly, the company delivered a sequential improvement in underlying earnings before interest, tax, depreciation and amortisation (ebitda).

The group continued to generate good cash flows and maintained a strong financial position, which provides the platform to continue investing in the business and to pay dividends. New organic growth investments are expected to deliver a meaningful ebitda contribution from 2025.

The stock is trading on a 12-month forward p:e of 13.5, which is close to its long-term through-the-cycle average, but with higher than normal growth to come over the next two years.

Technically, the price is in an inclining channel pattern and is still in a long-term bullish trend despite year-to-date weakness. The appearance of a golden cross (the 50-week moving average crossing above the 200-week moving average) shows that momentum has strengthened, affirming our positive stance. Our entry range is R334-R352 with an upside target of R388, or 13% above current levels. We recommend a stop loss at R325.

Take profit: South African listed property

The South African listed property index has performed very well so far this year, returning more than 20% to date. This has been a function of renewed optimism about exposure to South Africa Inc after the announcement of the government of national unity, as well as a strong rally in local bonds and an improvement in property fundamentals of late (the bottoming of negative reversions, improved vacancies and better trading, particularly in retail).

The sharp increase in share prices has led to overbought conditions in most stocks in the index (with relative strength indices above the 70 mark). We would expect broad profit-taking by short-term investors as well as investment managers running balanced strategies to lock in gains and take advantage of perhaps more near-term compelling opportunities in other asset classes. The correction may be temporary, but could provide a healthier foundation for future gains.

We will start by lightening exposure to Hyprop, Growthpoint, Nepi Rockcastle and Vukile. Besides Nepi, the other offshore exposure real estate investment funds (Reits) don’t look too expensive yet. Stor-Age has also lagged and is regarded as a more defensive play.

We would be interested in re-entering a position in South African Reits at about 15% below current levels.