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

Packaging division at the forefront of the way forward
CPH hosted its annual investor day event on 14 June 2021 where CPH highlighted its continued focus on implementing differentiation strategy in its Chemistry and Packaging Division, while pursuing the cost leadership strategy in the Paper Division to mitigate an unfavorable operating environment. The focus was on the Packaging Division, which the company believes will be a major growth driver in the future due to highly favorable end markets and division's differentiated offerings. Further, the group remains focused on implementing strategic measures such as expanding footprint outside Europe, reducing dependency on the Paper Division and trimming down the exposure to the Swiss franc in currency terms to mitigate the ongoing headwinds.

Packaging Division to provide the next leg of growth
Strategy enabled growth: The Packaging Division's net sales have registered a CAGR of 8% since 2015, whereas EBIT margins expanding 800bps over the same period (2020: 13.3% vs. 2015: 5.3%). The double-digit margin in the Packaging division is attributable to the continued and 100% focus on the pharmaceutical market and on packaging films with the high barrier properties, expansion of the product range to higher-value and high-barrier films and other cost efficiency measures.

Long-term drivers in place for further lift: The global pharmaceutical market is expected to register a CAGR of 3%-6% during 2020-25e, with emerging economies clocking a much higher growth of 7%-10% (CAGR). Such growth will be driven by megatrends such as the ageing global population, urbanization, civilization, lifestyle diseases, and improved medical and medicinal care.

Levers identified for further expansion: The division's primary focus, i.e 90% of the pharmaceutical offerings, is on the primary pharma packaging (blister packs, solid dosage forms), while 10% is on special applications (ampoule packagings, syringe packagings, medical devices). The demand for blister packaging is expected to clock a CAGR of >4%-7% during 2018-23e, whereas the demand for PVC monofilms grows at 3% to 5%, the higher margin coated PVdC barrier films grows at 7% to 9% during the same period. In line with the growing and emerging trends, the company is studying the expansion possibilities into new products and markets. The blister packs, which are used as barriers, can also be used as protectors from contamination and/or for transport, thus have the potential to become an incremental addressable market for the company. Similarly, the company exploring way to become a packaging specialist for primary pharmaceutical packaging such as containers, bottles, ampoules, syringes, etc. made of plastic, or other materials such as glass, metal or paper for the pharmaceutical market.

Well established network supported by state-of-the-art operations: CPH already has an operational presence in four out of the top five future pharma markets globally (in 2025e). The company has a direct sales presence in 85 countries and operates via local agents in >40 countries. It has state-of-the-art operations with five production sites spread across four continents. Of the five, the one in Brazil is expected to commence operations in 2Q22. The company is also at the forefront of innovation and has developed more than 10 innovative products since 1970. With such operational strength and a wide reach, the company stands to benefit from the ongoing development in the pharmaceutical market.

Growth to be balanced by sustainable approach: The Packaging division expects its mon-material blister systems to meet the requirements of the circular economy.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 91.3 per share, which is similar to our previous target price (CHF 91.3), implying an upside of ~32% 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 36% discount to the weighted average multiple of division peers.

The global economy is expected to recover gradually from 2021e with the IMF forecasting 6% 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 unfavorable operating environment. However, the Packaging and Chemical Divisions are expected to be the key beneficiary of a revival in economic activity and should offset the expected weakness in the Paper Division to some extent. Specifically, we believe the Packaging Division to emerge even stronger in the ongoing economic revival as it has all positive levers in place to capture upcoming opportunities. Operations aside, management's focus on offering sustainable solutions and the simplification of the corporate structure should improve investor sentiment going forward. We remain encouraged by management's commentaries, which did not include any 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.