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

Resilient performance despite global slowdown

2019: Unprecedented EBIT margin reflects disciplined execution

CPH group reported net sales of CHF 524.7mn for the full year 2019, down 1.7% compared to the prior year. The decline in absolute terms was CHF 8.9mn, out of which CHF 6.8mn
(-1.3% y/y) were attributable to FX headwinds. Revenue decreases were observed in the Paper and Chemistry divisions, where sales for FY2019 decreased 2.6% y/y to CHF 293.2mn and 1.5% y/y to CHF 78.2mn, respectively. The Packaging division showed a slight improvement with revenue up 0.1% y/y to CHF 153.2mn (up 1.7% if adjusted for FX).

The Group's reported sales came slightly below our projections and company guidance. The expectation was that the group would deliver marginally higher annual sales and maintain the EBIT margin at the levels of FY2018. While the group slightly missed revenue guidance, the EBIT improved significantly to CHF 56.6mn (+9.6% y/y) and the corresponding margin increased by 110bps to 10.8%, thus significantly above the guidance. EBIT margin thus reached double-digits for the first time since the stock exchange listing in 2001. The improvement was largely attributable to the reduction in the cost of key production items and cost of materials. Net profit improved significantly to CHF 48.5mn (+14.6% y/y), while non-operating income grew to CHF 0.8mn from CHF 0.1mn in FY2018. Gross profit was up 2.1% y/y to CHF 226.9mn and the corresponding margins improved ~150bps to 43.2%. Although the group started FY2019 on a positive note and reported a favorable 1H19, declining demand in the Chemistry and Paper business as well as production overcapacities and pricing pressure in the Paper business were the key headwinds that impacted the overall business in the second half of the year. On the dividend, the company proposes to the AGM of 17 March to distribute CHF 1.80 per share through a reduction of the nominal value to CHF 0.20 per share from CHF 2.0 per share, which will be tax-free for Swiss shareholders.

The Packaging division's revenue improvement was mainly driven by better product mix and improved pharmaceutical market trends. Operating profit surged to CHF 17.3mn (up 12.0% y/y) with the corresponding margin expanding by ~120bps to 11.3%. The softer revenues from the Chemistry was primarily due of lower demand on the back of the global economic slowdown and the US-China trade tensions. EBIT declined significantly to CHF 4.4mn (-28.1% y/y) with the corresponding margins contracting over-proportionately by ~210bps to 5.6%. The Paper division's sales decreased by 2.6% y/y (-1.1% y/y excluding FX impact) to CHF 293.2mn on the back of reduced demand on Europe's paper market and pricing pressure. Sales volume for newsprint and magazine paper products was down 4.3% y/y to 517k tonnes. However, operating profit improved by an impressive 15.2% y/y to CHF 34.7mn, thus the corresponding margin improved ~180bps to 11.8% primarily driven by cost efficiencies.

 

Focus on divisional balancing and expansion of planned activities

As the European paper market has been persistently challenging with volumes both in newsprint and magazine paper declining (and thus resulting pressure on paper prices), the company consequently started to actively focus on the expansion of its Chemistry and Packaging divisions five years ago in order to reduce its dependency on the Paper division. Also, the company has been successfully reducing its dependency on Swiss franc by developing new manufacturing facilities outside Switzerland. In addition, CPH strives to enhance its presence in higher growth markets outside of Europe such as Asia and the Americas. The successful implementation of this strategy has clearly born fruits in the past - not least in 2019 - and forms the basis for the renewed five-year corporate strategy until FY2024.

 

Valuation: significant discount compared to peers

CPH's share price was not able to profit from the positive stock market environment in 2019, reflecting the reduced demand and pricing pressure in the Paper division. However, at the current price level, CPH trades at a discount of 25% to its peers on 2020e P/S. Similarly, CPH is trading at a discount of 25% to its peer average EV/EBITDA for 2020e. Our DCF based target price is CHF 90.0 per share, implying an upside of 17.2% from the current level. We expect the company to achieve its earnings targets in the medium-term on the back of cost efficiencies and sustainability initiatives. However, increasing pricing pressure and currency volatility due to geo-political issues remains an overhang in the short term.