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

Mixed performance amid challenging market   

Profitability remains intact

In 1HFY2023, CPH’s net sales declined 7.8% year-on-year (YoY) to CHF 332.0mn. In constant currency (CC) net sales declined 3.9% YoY. This decrease was primarily impacted by a significant downturn in the Paper division, which saw a decline of 24.5% YoY. Nevertheless, the Packaging and Chemistry divisions' growth partially offset the decline. The Packaging division witnessed a growth of 14.4% YoY, while the Chemistry division showed a more modest increase of 1.9% YoY. The demand trends varied among the three business divisions. The Packaging division's production facilities were well-utilised, but the Chemistry division experienced increased margin pressures, and the Paper division faced a steep decline in demand. Overall, the divisions had mixed performance.

In 1HFY2023, raw material prices showed diverse trends. Paper prices recovered but remained at a high level. The plastics market, specifically PVC, experienced reduced demand due to the construction sector's activity, leading to a decline in prices. Despite a general decline in energy prices, energy costs were higher during this period. Despite the rise in raw material and energy costs, the company’s EBITDA remained steady at CHF 62.0mn (1HFY2022: CHF 62.0mn), and the corresponding margin expanded to 18.7% (1HFY2022: 17.1%).

In anticipation of supply shortages, pharmaceutical manufacturers boosted their safety stocks of raw materials and ordered packaging films well in advance during 2022. Consequently, the Packaging division witnessed record-breaking order volumes in 1HFY2023. This enabled the company to record growth in EBIT to CHF 53.0mn (1HFY2022: CHF 52.0mn), and the corresponding margin expanded to 16.0% (1HFY2022: 14.4%). The net result of the company attributable to common shareholders improved to CHF 61.0mn (1HFY2022: CHF 47.0mn). The significant increase is largely due to the land sales reported at the Full-Reuenthal operating site.

Outlook for FY2023e

The near-term macro-economic uncertainties like the impact of energy price developments, supply chain disruptions and ramifications of interest rate hikes by central banks in response to rising inflation resulted in management having a cautious outlook for FY2023e.

Group: Concrete divisional developments will depend on the unfolding of macroeconomic uncertainties in the key markets and time lags in passing the higher raw material costs to the market. Management expects FY2023e sales to be lower than in FY2022 and an EBIT in the higher double-digit millions. The absence of any unforeseen circumstances, the net result is expected in a similar range.

Paper: Raw material prices are expected to remain high levels in FY2023e. At the same time, elevated paper prices may not sustain and could experience pressure in FY2023e. As demand for newspaper and magazine printing paper in Europe already declined by 15.0% and ~30.0%, respectively, in 1HFY2023, the Paper division expects demand to be lower for the year as a whole, resulting in substantially lower net sales and EBIT compared to FY2022.

Packaging: The global market for blister packaging is expected to grow by 3-6% over the next years. The division aims to further gain market shares; thus, we expect net sales to grow at a rate of around 2.0% in FY2023e. Moreover, with plans to pass on the raw materials costs to the market, the EBIT margin in FY2023e is expected to be ~14.0%.

Chemistry: Net sales are expected to increase in FY2023e, and EBIT for the year is likely to be broadly in line with its FY2022 level. The division’s planned investment of around CHF 14.0mn in infrastructure investments at the Chinese operating site and efficiency enhancements at the U.S. operation are currently in progress.

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 97.8 per share, same as the previous target price (CHF 97.8) and implies an upside of 12.4% from current levels. For relative valuation, since the Group operates in three entirely different divisions, we compare 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 an EV/EBITDA multiple of 5.3x (FY2023e), a significant 39.0% discount to the weighted average multiple of division peers.