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


CPH marks bicentenary with record results

2018: Record operating performance across segments
CPH Group reported a healthy set of numbers for the full year 2018, with revenue up by 13.6% y/y (organic 9.9%) to CHF 533.5mn. The increase in absolute terms was CHF 63.8mn out of which CHF 46.3mn was attributable to organic growth and CHF 14.1mn (3.0% y/y) to net favourable impact of FX along with CHF 3.4mn (0.7% y/y) of acquisition and divestiture activities. The revenue growth was broad-based, with the Packaging division up 17.5% y/y to CHF 152mn, followed by the Paper and Chemistry divisions, where sales for FY2018 increased 14.0% y/y to CHF 301.1mn and 5.3% y/y to CHF 79.4mn, respectively.

The Group's reported sales came in-line with our projections and achieved the guidance provided by the company post 3Q'18. The company in its guidance mentioned that the group is expected to deliver net sales growth only slightly below what it achieved during 1H2018 (which was 14.0% y/y) for the full year 2018. The Group reported operating profit (EBIT) of CHF 51.6mn (up CHF 48.7mn y/y), with the corresponding margin of 9.7% coming well within the guided range of 9-11%. The absolute EBIT and the EBIT-margin are unprecedented since the stock exchange listing in 2001. The net profit of CHF 42.3mn more than doubled in 2018 (CHF 16.2mn in 2017), demonstrating strong performance and efficiencies across divisions. This is even more significant as the non-operating profit declined to CHF 0.1mn from CHF 22.8mn in FY2017. Gross profit increased 38.0% y/y to CHF 222.3mn and the corresponding margin improved ~740bps to 41.7%. The increase in margins reflected CPH's continued efforts towards improving efficiencies to counter the adverse trend of rising prices of key raw materials across the segments. Although recovered paper prices increased during the period, procurement costs could be kept low thanks to increase in the proportion (~81%) of waste paper sourced from Switzerland as a result of the Utzenstorf integration as of early 2018 (see below). This has helped in lowering the transport costs for the segment.

The Packaging segment's revenue grew 17.5% y/y to CHF 153.0mn, while operating profit stood at CHF 15.4mn, up 61.2% y/y, with the corresponding margin at 10.1% (7.3% in 2017). The revenue growth was primarily led by an increase in volumes and greater contribution of high-barrier films. Revenues from the Chemistry segment rose by 5.3% y/y to CHF 79.4mn, aided by the acquisition and integration of the molecular sieves distribution business of Shanghai Yusheng Chemical Co. Ltd. in China and the business activities of Armar AG. EBIT increased by 60.6% y/y to CHF 6.1mn while the corresponding margin rose to 7.7% (5.1% in 2017). The Paper division's sales increased 14.0% to CHF 301.1mn on the back of higher paper prices and positive FX impact, partially offset by sales volume which was down 2.4% y/y to 540k tonnes. The volume declined as the demand for newsprint in Western Europe fell 8.2% further to 4.6mn tonnes and demand for magazine paper declined 4.7% to 3.8 million tonnes. The Paper division increased its EBIT significantly to CHF 30.1mn from an operating loss of CHF 12.3mn in 2017 and the corresponding margin came at 10.0% (cf. -4.7% in 2017).

Integration coupled with cost efficiencies, the key to growth
Full integration of its China-based Chemicals' (ALSIO) and Packaging plants have allowed the company to transfer significant parts of its operations to China, thereby lowering costs and freeing up other facilities to produce higher-value products to improve the mix further. This has not only helped the company to reduce its operating costs but also to increasingly realign the cost base with that of the revenues. The company has also founded a new subsidiary "APS Altpapier Service Schweiz AG", a separate brand within the paper division, to handle additional upstream activities within the recycling process consequent to the take-over of the waste paper collection and processing contracts of Papierfabrik Utzenstorf AG. These steps should help the company to increase its profitability in the near to medium term.

Valuation: outperformed the benchmark by a wide margin
CPH has significantly outperformed the SPI Index in 2018, reflecting growing investor interest and confidence. Since 2018, CPH shares are up 57.8% (SPI: 2.8%), reflecting successful execution of its business realignment plans. At the current price level, CPH trades at a discount of 50% to its peers on 2019e P/S. Similarly, CPH is trading at a discount of 19% to its peer average EV/EBITDA for 2019e. Our DCF based target price is CHF 100.7 per share, implying an upside of 14.4% from the current level. We expect the company to maintain its earnings growth in the near to medium-term. Also, with improved paper prices in 2018, relatively stable FX, along with a conducive environment in the Packaging division and a successful repositioning of the Chemistry division, CPH should be able to further improve its performance.