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


Rising demand for products in the Chemistry division to drive future growth 

CPH hosted its investor day on 13 September 2022 where CPH highlighted its continued focus on implementing differentiation strategies in its Chemistry and Packaging division, while pursuing the cost leadership strategy in the Paper division to mitigate an unfavourable operating environment. The focus of this year’s event was on the Chemistry division, which is a leading global supplier of molecular sieves (zeolites), chromatography gels and deuterated products, all trading under the Zeochem brand. The division is convinced that the demand for molecular sieves for the purification of ethanol, natural and industrial gases, and concentration of industrial oxygen will continue to rise in the future owing to megatrends in Health, Energy and Mobility. As a whole, the Group remains committed on implementing strategic measures such as expanding its footprint outside Europe and trimming down the exposure to the Swiss franc in currency terms by expanding production capacities outside Switzerland. The closure of the Uetikon site has also reduced dependence on the Swiss franc in currency terms.
 

Chemistry division to provide the next leg of growth

1.  Strategy enabled growth: CPH is internationalizing its Chemistry division’s operations by strengthening and establishing its distribution channels in Latin America and the Middle East, and developing new markets in Asia and in North and South America in line with its strategy of increasing the proportion of group net sales generated outside Europe. Through investments in distribution and capacities, the company aims to gain further market shares from competitors.The Chemistry division’s net sales have registered a CAGR of 50% over FY2015-FY2021, whereas EBIT margins have increased significantly to 16.1% in FY2021 vs. -2.9% in FY2015, supported by Zeochem’s strategic realignment since FY2014.

1.  Structural megatrends to drive long-term growth: 

• Healthcare: The healthcare markets in most countries are growing 7% faster than their GDP, and the value of these markets is expected to quadruple to USD 20bn by FY2030 (vs. FY2010). This trend should provide long-term growth opportunities for Zeochem, which manufactures high-performance molecular sieves for the production of medical oxygen, chromatography gels to purify APIs and neutraceuticals, and methanol- and deuterium-based solvents to optimize the dosages of medications for the human body.

• Energy: The rising switch from fossil to sustainable energy sources globally to reduce CO₂ emissions for countering climate change should increase the demand for Zeochem’s products especially for molecular sieves, which are used in the purification of natural gas, in oxygen concentration processes and in producing ethanol as an alternative energy source.
   
• Mobility: With the rise of a global mobile culture, changes through new products and services and the future use of transportation, Zeochem’s offerings that ensure the transition from oil and coal to renewable energy technologies, and products which are used in vehicle braking systems and interiors of various transport vehicles are in huge demand.
   

1. Levers identified for further expansion: The company is also at the forefront of innovation and remained focussed on developing high-value products (Li, binder-free, DMSO, methanol) as well as building new applications for Zeochem products (spacers/Purmol, OLED/DMSO) which should continue to generate higher sales in new markets.

1. Zeochem: Extending the lifespan of OLED displays: With rising consumer preference for OLED displays in TVs (proportion of new televisions featuring OLED screens rose from 25% to 40% over mid-2020 to mid-2021), smartphones, laptops and motor vehicles owing to its technological superiority in the display of colours and efficiency, the demand for deuterated solvents is increasing. The use of deuterated solvents will extend the lifespan of new generation OLEDs (the market is expected to further see 13% per annum growth over the next 5 years) which should benefit CPH since Zeochem has >75 years of experience in the silicate chemistry sector and is one of the three leading providers of such products worldwide. To meet the growing demand, CPH’s Chemistry division is building a further deuterated dimethyl sulfoxide distillation plant at its Rüti site in Switzerland, which should come into operation in 2022.

Broad-based revenue growth across all divisions in 1H2022

For 1H2022, CPH’s net sales increased 47.7% YoY to CHF 360mn, driven by growth in all three segments thanks to strong demand, despite the adverse impacts of the Ukraine war, COVID related lockdowns in China and challenges in raw material procurement and transportation logistics. Despite the substantial rise in raw material prices, transport and energy costs, the company’s EBIT increased significantly to CHF 51.9mn (1H2021: CHF 5.7mn) and the corresponding margin expanded to 14.4% (1H2021: 2.4%).

The Paper division’s revenue growth improved significantly by 78% YoY, mainly thanks to higher paper prices driven by a demand imbalance as a result of lower paper production volumes due to permanent capacity closures and a long strike at one of the Paper division’s competitors. The Chemistry and the Packaging divisions registered 18.9% YoY and 27.5% YoY growth, respectively. During 1H2022, the company’s Paper and Packaging divisions reversed their EBIT margin declines of the prior-year period, while the Chemistry division’s EBIT fell 1.6% YoY to CHF 7.3mn and its corresponding margin contracted to 13% (1H2021: 15.7%).
 

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 97.7 implies an upside of ~36.1% 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 analyse the relative valuation of the Group. CPH currently trades at a EV/EBITDA multiple of 6.1x (FY2023E), a significant 22% discount to the weighted average multiple of division peers.

The global economy is expected to recover only gradually, with the IMF slashing 2022e and 2023e forecast to 3.6%. In the short term, we thus believe ongoing inflationary headwinds and prospects of a slowdown may weigh on the company’s prospects. On a positive note, the company was able to pass on the higher raw material and energy costs to the most extent. In the same line, the current shortages of raw materials like recovered paper are expected to stay on a high level over the next few months with the respective impact on costs. Although in the last couple of years the performance of the Paper division was not encouraging, the supply side squeeze should keep the division’s profitability at an acceptable level. Moreover, the operating results of the Packaging and Chemistry divisions are expected to improve. A better bottom-line at Group level along with net sales increases and the cost optimisation efforts are expected to offer a required boost to the company’s stock price.