This report is published by Research Dynamics, an independent research boutique

Tapping into growing packaging market

Perlen Packaging to set-up a film coating plant in Brazil
CPH Group's Brazilian subsidiary Perlen Packaging is setting up a new film coating plant in Brazil. The new plant is going to require an investment in higher-single-digit millions and would produce new PVdC film coatings with a capacity of 6,500 tonnes per annum. The plant is expected to commence operations in 1Q2022. Also, Perlen Packaging is supporting its Brazilian partner in the construction of a new mono PVC film manufacturing facility by providing a loan. Incrementally, the Packaging division would acquire the remaining 40% stake in Perlen Packaging Anápolis, which it had acquired (60% stake) in 2018.

Expansion is key to tapping high growth emerging markets like Brazil
CPH is expanding its presence in the emerging markets as it sees high growth potential for packaging products in those markets. The company already has film coating plants in Switzerland and China. Now with a proposed plant in Brazil, CPH would be able to tap into a growing Latin American pharmaceutical market, specifically Brazil, which is the world's sixth-biggest pharmaceutical market. CPH foresees the region's pharmaceutical market from current to grow at a CAGR of 6-9% till 2024E. Such growth prospects are expected to help the company to consolidate its position in the region's market for films, which has high barriers to entry. Notably, since the acquisition, Packaging division's sales from Latin America have grown in double digits annually.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 87.2 per share implies an upside of 29.7% from current levels. For relative valuation, since the Group operates in three entirely different divisions, we compare each of CPH's divisions with different sets of relevant industry peers. We have employed three parameters - EV/EBITDA, P/S and P/E - to analyze the relative valuation of the Group. CPH currently trades at a P/S multiple of 0.9x (FY2020E), a significant 34% discount to the weighted average multiple of division peers.

We remain encouraged by the management's focus on diversifying the offerings towards more remunerative business and regions. That said, in the short-term, we expect the uncertainty to continue in 2H2020 as economic activity is likely to pick up only gradually amidst the ongoing coronavirus pandemic. However, in the medium term, as business activity picks up steam, we expect the valuation discount to narrow and the stock to witness a revaluation.
We opine that the company's growth prospects in key markets, improved operating efficiencies from new production facilities and expansion of the Packaging and Chemistry divisions should lead to a valuation improvement. The Paper division should benefit from local market, cost leadership, cost saving initiatives, advanced technology and continued operational improvements, although the business environment continues to remain challenging due to overcapacities and decreasing demand for newsprint paper. However, over time tough the operating environment may push marginal paper producers out of business which should lead to reduced capacities and aid a recovery in paper prices. Moreover, we expect the group-level cost optimization initiatives to offer support to the company's stock price.