Shares in Mondi, the South African paper maker, have been through the shredder: down by more than a half since the start of this year and nearly two thirds since demerger from Anglo American last year.

They fell to a new low yesterday as Mondi brought forward its planned third-quarter trading update to caution that underlying full-year operating profits would be 10 to 15 per cent lower than 2007. Given that profits in the first nine months of the year were modestly ahead, and that trading in its home South African market continues to improve, that shortfall implies a truly terrible end to 2008 – a year-on-year decline in fourth-quarter earnings of about 35 per cent.

The culprit is Western Europe, where the usual post-summer pickup in demand has failed to materialise. Prices in Mondi’s bags and specialities division – which provides heavy-duty industrial packaging for building materials, chemicals and animal feed – have held up well, but volumes have been hit by dwindling construction activity. Elsewhere, Mondi’s corrugated paper business has suffered from falling prices for containerboard, combined with high energy costs. Mondi’s problem relative to its peers is that it produces more packaging paper than it uses, which means that it is susceptible to falling wholesale prices when it comes to selling on that surplus. In contrast, prices for cardboard boxes have proved resilient, boosting margins for “downstream” manufacturers who buy in paper from elsewhere.

The upshot is that Mondi is being forced to cut costs, is running some of its European plants below peak capacity and is contemplating further closures beyond the cutbacks already announced in Britain and Spain. It also plans to scale back its capital expenditure – other than the €830 million it has committed to new plants in Russia and Poland – to considerably below its depreciation charge. Mondi’s longer-term advantage is its exposure to lower-cost emerging markets.

But that strategic allure is offset not only by the cyclicality of the paper industry but by the fact that Mondi appears to sit in the most difficult parts of it. Whereas production capacity in coated fine paper – a market dominated by Sappi, its South African rival – is shrinking, that in uncoated paper is actually due to increase next year: which is unfortunate, given its coincidence with falling demand. That suggests that the oft-forecast demise of Mondi’s higher-cost rivals (a key prop to the case for buying the shares) might take longer than expected to occur. With net debt of €1.7 billion and cash conservation increasingly to the fore, Mondi’s dividend – which gives a prospective yield of 9 per cent – might also come under pressure.

At 203½p, or nine times sharply lowered 2009 forecasts, it is not too late to sell.

Senior

Shareholders in Senior would do better to keep an eye on Seattle than its Hertfordshire headquarters. Boeing is the biggest customer of the mid-cap aerospace engineer (it accounts for about 12 per cent of sales), which means that it is starting to feel the fallout from a strike that has paralysed production at the US aircraft maker for the past six weeks. Senior has already moved to a three-day week at some of its plants but said yesterday that an extension of the dispute until the end of the year would wipe £10 million off sales and £3 million off profits.

But in sending shares in Senior down nearly two thirds since the start of September, the stock market appears more worried about a severe cyclical downturn in civil aerospace – more specifically that airlines will cancel new aircraft orders en masse. Senior’s exposure to car and truck makers and faltering oil and gas demand through its Flexonics division is also unhelpful.

The anomaly is that Senior’s shares have suffered far worse than peers such as Hampson Industries and Umeco. It has net debt of about £130 million but, having recently issued $120 million (£70 million) of loan notes, it requires no further refinancing for four years.

At 42p, Senior sits at four times next year’s earnings, which implies a halving of pretax profits from the forecast £58 million. On the assumption that that is too pessimistic, those with the mettle should buy.

Aga Rangemaster

Selling household goods at an average £7,000 a go is a hard game in a consumer recession. Ask Aga Rangemaster, the maker of upmarket cast-iron cookers, whose shares fell to a 23-year low yesterday after it gave warning on profits.

Aga’s order intake fell more than 15 per cent in September – the start of its key autumn selling period – against the 5 per cent dip it reported over the summer months. Demand for its Rangemaster cookers – which tends to track housing transactions – remains poor. In America, sales of its Marvel fridges continue to weaken. The comfort is that higher energy prices have elicited increased interest in woodburning cookers and stoves, a niche that is “performing strongly”.

The alert yesterday confirmed the suspicion that Aga sold its better half when it disposed of its catering equipment division last year for £260 million (albeit that price would be impossible to achieve today). Shareholders who received a £140 million special dividend from that transaction have since had to wear a tumbling share price and now face the prospect of sharply lower profits and a likely cut to the regular payout. Aga retains a modest cash pile, but the attraction is dimmed by pension fund commitments. Similarly, a multiple of nine times 2009 earnings is not especially cheap.

Tempus advised “sell” in May at 292p. Even at today’s 85¼p, it is best avoided.

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