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

Navigating a challenging environment

Muted 1H/20 results, with cautious short-term outlook

CPH reported a muted set of numbers, with the top-line decreasing by 13.3% YoY to
CHF 231.8mn (-8.2% YoY ex-currency) due to the adverse impact of the coronavirus pandemic. The net sales erosion was mainly attributable to the weakness in the Paper division (-25.9% YoY). Group EBIT decreased to CHF 17.8mn from CHF 32mn in 1H/19, with the EBIT margin compressing to 7.7% from 12.0% in the same period last year. Despite the top-line and EBIT margin pressure, net profit attributable to shareholders grew by 1.0% to CHF 27.4mn, with the corresponding margin improving by 168bps to 11.8%. The bottom-line improvement mirrored an extraordinary income of CHF 12.0mn, attributable to the release of provisions for lower-than-expected costs for clean-up works required at the Chemistry division's former Uetikon operating site. Although all divisions reported positive EBIT for the period, the Paper division dragged Group EBIT. Amidst the pandemic, lower demand for printing paper has led to pressure on advertising income for media publishing houses, which forced them to reduce their publication sizes and print runs. The Paper division reported an EBIT of CHF 2.3mn, significantly lower compared to the CHF 19.0mn reported in 1H/19, and the corresponding margin decreased to 2.1% from 12.9% during the same period last year.

Estimate change
The reported 1H/20 result is muted as expected due to the current coronavirus pandemic. For the second half of the year, the recovery in business activity is expected to be slower. Considering the prevailing operating environment, we have lowered our FY2020 estimates. The net sales and EBIT have been revised downwards to CHF 447.8mn and CHF 20.2mn from CHF 503.8mn and CHF 26.4mn, respectively. However, we raise our PAT estimate to CHF 27mn from CHF 22mn to primarily account for the extraordinary income from release of previous provisions in 1H/20.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 87.2 per share is a slight reduction from our previous target price (CHF 90.0), implying an upside of 22.5% 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 36% discount to the weighted average multiple of division peers.

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.

We remain encouraged by management's commentaries which did not include any major 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.