CPH strengthens its Packaging Division with Sekoya acquisition

Sekoya Indústria e Comércio Ltda. will be integrated in CPH’s Packaging Division

CPH’s packaging division, Perlen Packaging AG, has agreed to acquire a 60% stake in its long-established distribution partner Sekoya Indústria e Comércio Ltda. The acquisition, which will be effective retroactively from 1 January 2018, will help the company to expand its footprint in the Americas by having its own distribution company and finishing plant.

Perlen Packaging has retained the founder, Wellington Branquinho, and his team of 12 people to continue to run the company. Branquinho started Sekoya in 2012 and will retain 40% stake in the company.

Sekoya has been distributing mostly CPH’s packaging products in Brazil, thus not much 3^rd party revenue has been generated. Through its finishing plant, Sekoya also produces film products according to the local pharmaceutical customers’ requirements which will help Perlen Packaging to improve its flexibility as well as efficiency further in the Latin and South American region. Sekoya itself is expanding by opening a new location in Goiania in the next few months. This acquisition provides Perlen Packaging a better access to Brazil, one of the bigger emerging markets, and is expected to provide further growth impetus.

CPH, with this acquisition strengthening the highest margin division in the group, and along with the acquisition of Armar AG (in the chemistry division in November 2017) is showing its resolve to decrease its dependency on the paper business. Also, the company with its new film coating production facility in China and the announced deal in the Latin America has established a truly global footprint.

Financial details regarding the transaction were not disclosed by the parties. The transaction is expected to close at the end of February 2018. Since no further information is available regarding this transaction, we leave our current income statement, balance sheet and cash flow estimates unchanged. The company will be publishing the FY17 results on 20 February, which will give us more clarity on how the different divisions are developing.

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. In the DCF analysis, we have updated our WACC to 5.2%. WACC has changed from 6.1% earlier due to change in Debt/Equity ratio as the stock price has increased considerably. Considering the improving growth prospects we increased our target price to CHF 67.00 per share from CHF 60.90 per share earlier, which gives an upside of 3.1% from the current levels.

On a relative basis, the stock is trading at a steep discount of ~51% to the weighted average of its peers on a 2018E P/S basis. Similarly, the company trades at discount of ~33% on a 2018E EV/EBITDA basis.

We believe, in the medium-term, the stock could trade at higher multiples on account of an increased contribution of sales and operating profits expected out of the Asia-Pacific region and higher operating efficiencies from the new production facilities coupled with acquisition synergies.