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

Diversification helped tide over adversities

Sound operating performance amidst a harsh environment
CPH reported a sound operating performance for FY2020, which otherwise was marked by the Covid-19 induced economic slump. Group net sales in FY2020 declined by 15.1% YoY to CHF 445.2mn (-10.7% excluding currency impact). The diversified nature of the businesses aided the company to offset significant losses at the Paper division. EBITDA declined by 37% YoY to CHF 55mn. Rigorous cost reduction programs and productivity improvement measures averted a considerable drop in the EBITDA. Lower energy and raw material costs (in the Paper and Packaging Divisions) also helped in mitigating the decline. Group EBIT declined by 56% YoY to CHF 24.7mn (FY2019: CHF 56.6mn), the corresponding margin compressing to 5.5% (10.8%). However, net profit attributable to shareholders declined by only 3.1% to CHF 47.0mn. Reasons for this is include an extraordinary income of CHF 12.0mn, which is attributable to the release of provisions for clean-up works required at the Chemistry Division's former Uetikon operating site, non-operating income of 6.8mn resulting from the sale of real estate (CHF 5.2mn) and the release of provision for the Rotholz site (CHF 2.0mn) as well as positive income taxes (CHF +8.1mn) thanks to tax loss-carry forwards (CHF 11.9mn).

Segmental performance
Paper: The Paper Division reported a 28.5% YoY (excluding currency: -25.8%) decline in sales to CHF 209.6mn. The paper division and the industry, in general, have been facing structural headwinds due to the emergence of digital media that has resulted in the declining volume of print and magazine papers. The outbreak of Covid-19 exacerbated the problem further. Faced with weak demand and lower paper prices, the company kept both its paper machines temporarily shut down. Consequently, EBITDA declined by 68.1% to CHF 17.4mn (CHF 54.5mn), whereas EBIT came down to a negative CHF 2.0mn (CHF 34.7mn). It is worth highlighting that while many players were struggling to survive, CPH's Paper Division could hold on due to its cost-efficient paper manufacturing assets like PM7 and coated magazine paper machines.

Packaging: Net sales improved by 5.9% YoY (excluding currency: +10.7%) to CHF 162.3mn (CHF 153.2mn). Unlike the Paper Division, the Packaging Division benefited from the pandemic due to the massive jump in demand for medicinal products for which the company supplies packaging materials. The division that supplies films for blister packs used in the pharmaceuticals' industry experienced record levels of new product orders. Accordingly, EBITDA improved 17.2% YoY to CHF 27.8mn. The segment EBIT also increased to CHF 21.6mn (CHF 17.2mn) and the corresponding margin improved by 210bps YoY to 13.3%. The sizable decline in raw material prices also aided improvement in the segment's profitability. This aside, with an aim to cater to high growth markets like Latin America, the company is investing in a new coating plant in Brazil.

Chemistry: Net sales declined 6.3% YoY (excluding currency impact: -0.7%) to CHF 73.3mn due to weaker demand from key end-user industries like Energy and Industrials. However, incoming orders for molecular sieves employed in the concentration of medical oxygen reached new record levels and partially offset the weakness elsewhere. The division undertook vigorous cost-cutting measures that led to a flat YoY EBITDA of CHF 9.5mn. EBIT however, improved 4.7% YoY to CHF 4.6mn, and the corresponding margin expanded to 6.3% (5.6%).

Estimate changes
The recovery in the economic activities bodes well for CPH, but the challenging operating environment in the Paper Division is expected to drag the group's profitability in the short-term. Considering the prevailing operating environment in the Paper Division, we have lowered our FY2021 estimates. The group net sales and EBIT have been revised downwards to CHF 446.1mn and CHF 3.4mn from CHF 458.8mn and CHF 20.4mn, respectively. Similarly, we have lowered the net profit estimate to CHF 0.8mn from CHF 16.3mn.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 91.3 per share, which is the same as our previous target price (CHF 91.3), implying an upside of ~35% 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 (FY2021E), a significant 33% discount to the weighted average multiple of division peers.

The global economy is expected to recover swiftly in 2021e with the IMF forecasting 5.5% growth in 2021. While this bodes well for the business in general, in the short-term, we expect the uncertainty to continue. Specifically, the Paper Division is expected to be under pressure due to an unfavourable operating environment. However, the Packaging and Chemical Divisions are expected to be the key beneficiary of a revival in the economic activity and should offset the expected weakness in the Paper Division to some extent. Operations aside, management's focus on offering sustainable solutions and simplification of the corporate structure should improve investor sentiment going forward. We remain encouraged by management's commentaries which did not include any significant changes to the mid-to-long-term goals. Moreover, we expect the group-level cost optimization initiatives to offer support to the company's stock price.