Mayr-Melnhof: With Foresight And Success Through The Crisis

Summary

• Mayr-Melnhof's business model indicates strong stability in times of crisis.
• The COVID-19 crisis has confirmed this. The company has hardly suffered any damage here.
• The management is acting very farsightedly and cautiously.
• Although there will be no dividend increase this year, the management is merely showing caution here. I assume that the next increases will be higher.

Introduction

Mayr-Melnhof Karton AG (OTCPK:MNHFY) (OTC:MNHFF) is a European champion. This is what I call companies that are just as good quality as Anglo-American blue-chip stocks. The COVID-19 crisis has confirmed this impression. The company's business is system relevant, and the company's products are in extremely high demand. The management continues to act with foresight and thinks long term. I have increased my stake in the company from time to time and will continue to do so. In the article, you will find out why Mayr-Melnhof has convinced me again.

Crisis-proof in theory

Just to sum a few things up. Below you will find a short description of the family-owned (57 percent) Austria company, taken from a recent analysis:

Mayr-Melnhof is a manufacturer in the paper and packaging industry and one of the largest manufacturers of recycled paper board and a leading producer of folding cartons. With a production volume of over 60 billion folding cartons each year and with more than 1,500 customers, the company holds a leading position in the global packaging market.

The business is divided into two segments:

• Karton
• Packaging.

Mayr-Melnhof Karton is (according to the company) the world's largest producer of coated recycled fiber-based cartonboard with a significant position in virgin fiber-based cartonboard. Furthermore, it is the leading producer of folding cartons in Europe and one of the largest producers worldwide. The distribution of sales and earnings between the two divisions is also relatively uniform.

The company, therefore, produces cardboard and packaging materials. The company prints these materials and sells them to other companies from all kinds of industries (medical, consumer goods, etc.).

(Source: Top customers)

What conclusions can investors draw from this business model?

I believe that first of all, the fundamental development of the world economy towards a globalized market and a globalized society is advantageous for Mayr-Melnhof. Products are no longer manufactured locally and sold locally, but the individual components are made worldwide and sometimes shipped all over the world. Then they are assembled and sent again across the globe. For a company that produces packaging material and cardboard, this is like paradise.

The second aspect is that the products the company manufactures are primarily used to ship everyday products. These consumer goods products are relatively price-stable and less cyclical. Even in times of crisis, people need their medicine and everyday objects.

In theory, this results in a stable business model. In a crisis, it is, therefore, to be expected that a company like Mayr-Melnhof should probably not suffer as much as other companies, and this is what has now happened in practice. So far, Mayr-Melnhof has come through the COVID-19 crisis very well. How exactly, we will look at in the following section.

Mayr-Melnhof has demonstrated its value in practice

Given the circumstances, the company has finished the first quarter of 2020 very successfully. In the Karton segment, operating profit rose by 24.9 percent. The company benefited in particular from increased demand in the consumer goods industry, which in turn was offset by weak demand for luxury goods. However, if one considers the extent of the economic slump in many countries, this has left Mayr-Melnhof's sales relatively untouched.

(Source: 1Q 2020 results)

Also, the company had a capacity utilization of 98 percent in the 1st quarter of 2020, which is quite high (also in historical comparison).

The Market has recognized the value

The Market has also realized how well equipped the company is. Initially, the share price fell sharply. At this point, investors must bear in mind that the free float is relatively low, which means that the share price will fluctuate more sharply in volatile times. I also suspect that many investors were afraid that Mayr-Melnhof was too dependent on the general economic development and would suffer particularly badly. But the opposite seems to be the case, and so the Market is shifting capital back into the company. Accordingly, a classic V-shaped recovery took place.

(Source: Stock price performance)

Management acts prudently and will not increase the dividend

For the next quarter, the company is cautious for the time being and does not give a correct forecast.

The demand for our products, cartonboard and cartonboard packaging for consumer staples, has a certain resilience and is currently doing well overall, it is difficult for us to assess how much is attributable to end-consumption or stockpiling. On the cost side, we are facing price increases for the important raw material of recovered paper, which we are countering with higher prices for recycled fiber-based cartonboard.

This precaution is also reflected in the fact that, for once, the company has not increased the dividend. Due to the current uncertainty, the management wanted to wait and see how things would develop. I am not sure if a small increase would not have been possible. The payout ratio is already comfortable:

(Source: 1Q 2020 results)

However, management knows what is best for the company, and it is better to be a little more cautious than to be too cocky and then cancel the dividend (like Hugo Boss (OTCPK:BOSSY)). Besides, the dividend for this year has already been paid, so that investors will only receive a dividend again next year.

If Mayr-Melnhof keeps the dividend stable next year, the yield on investment will be 2.5 percent. However, I assume that the company will increase the dividend next year, perhaps even by 15 - 20 percent. This would correspond to the growth in profits. It would only be different if the upcoming quarters turn out to be surprisingly bad for the company. But so far, there are no indications of this.

Still a good choice in fundamental terms

Fundamentally, the company is undervalued. It is traded under both its historical P/E ratio and its historical P/C ratio.

(Source: Fair Value calculation)

The company is also blessed with financial strength. With a debt ratio of less than 40 percent, it is well equipped to survive worse times without further problems.

(Source: Debt ratio)

Conclusion

After every analysis of a company, I will use a three-grade rating. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing in. The three steps rating at a glance.

Buy the jewel now rather than tomorrow if:

• There are no downsides, and the company has growth potential.*
• The upsides outweigh the downsides, and the company has enormous growth potential.

Worth an investment (maybe later after a second look) if:

• The upsides outweigh the downsides.
• The upsides are equal to downsides, but the company has growth potential.

No thanks if:

• No growth potential in the long term.
• The downsides outweigh the upsides.

*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.

Conclusion: The grade for Mayr-Melnhof

Mayr-Melnhof has shown how crisis-proof the business model is and how far-sighted the management acts. During the COVID-19 volatility, there was a small window of opportunity where the company was a real bargain. Currently, this window of opportunity has closed. Nevertheless, Mayr-Melnhof is still fundamentally undervalued. I will continue to increase my shares in the company. It is an excellent investment for any broadly diversified retirement portfolio.

Mayr-Melnhof is part of my diversified retirement portfolio. If you enjoyed this article and wish to receive other long-term investment proposals or updates on my latest portfolio research, click "Follow" next to my name at the top of this article.

Disclosure: I am/we are long MNHFF, MNHFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.