Research Dynamics
Report on CPH: HY2021 earnings update

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

Capex plans in place to tap emerging opportunities

Chemistry and Packaging divisions continue to perform well
CPH reported 5.1% YoY growth (+5.7% excluding currency impact) in net sales to CHF 243.7mn. The Chemistry and the Packaging Divisions continue to perform well and offset the weak performance in the Paper Division. The group EBITDA declined by 40.4% YoY to CHF 20mn largely due to a significant drop in the EBITDA of the Paper division. Group EBITDA margin declined 630bps to 8.2%. Group EBIT declined by 67.8% YoY to CHF 5.7mn (1H20: CHF 17.8mn) and the corresponding margin compressed to 2.4% (1H20: 7.7%). On account of significant margin pressure, the net profit attributable to shareholders declined by 78.3% to CHF 5.8mn.

Segmental performance

Paper: Net sales declined 3.2% YoY (excluding currency: -3.1%) to CHF 105.4mn. The division’s 1H21 sales volume was higher as compared to 1H20 when the machines were kept idle due to the imposition of lockdown measures. However, persisting over capacities dragged the paper prices lower, thereby pressuring the realizations and effectively net sales. Consequently, the division’s EBITDA loss came in at CHF 1.5mn (CHF 12.5mn), whereas EBIT came down to a negative CHF 10.1mn (CHF 2.3mn). While the end-user demand recovered, the sharp jump in the recovered paper prices to their historical highs has had an adverse impact on raw material cost. Consequently, EBIT declined significantly, despite optimization and cost-saving initiatives.

Packaging: Net sales improved 4.7% YoY (excluding currency: +3.8%) to CHF 90.8mn (1H20: CHF 86.7mn). Demand for packaging material suffered slightly compared to 1H20 due to the absence of the usual seasonal flu, which resulted in lower demand for medicines and effectively packaging products from pharmaceutical companies. The division reported lower volume in Europe and North America, however, it was more than offset by double-digit growth in LATAM and Asia. EBITDA declined 28.4% YoY to CHF 11.5mn, and margins compressed by ~600bps to 12.7%. EBIT dropped by 35.5% to CHF 8.4mn and the margin contracted by 570bps YoY to 9.3%. Higher raw material and transportation costs and the delay in passing on the costs resulted in lower profitability.

Chemistry: Net sales increased 31.1% YoY (excluding currency impact: +36.7%) to CHF 47.5mn due to improvement in demand. The growth was aided by a surge in the demand for molecular sieves, in which the company has developed a leading position through its innovative offerings. The molecular sieve powders (above all medical oxygen) also showed encouraging trends, while the demand from the energy industry has yet to pick up to pre-pandemic levels. EBITDA went up ~100% to CHF 9.8mn (CHF 4.9mn) and EBIT to CHF 7.4mn (CHF 2.5). Both EBITDA and EBIT margins improved 700bps and 870bs to 20.8% and 15.7%, respectively.

Cautious outlook for 2021
The world economy is expected to rebound in 2021, however, the economic revival may have a varying degree of impact on each division, and specifically, the demand-supply equation should dictate the fortunes in our view. The management too has provided a cautious outlook for FY2021e that primarily reflects challenges surrounding the Paper Division.
Paper: With the closure of 3.3mn tons of graphic printing paper capacity over 2020-21, the paper prices may inch up in 2H21. However, this will not be sufficient to offset the elevated raw material prices. Accordingly, for FY2021 the division’s net sales are expected to be slightly higher than the 2020 level, but EBIT is expected to be negative.
Packaging: In response to the jump in raw material prices, the company will be gradually adjusting the product prices up. The company is also looking at expanding its product offerings in the overseas market and setting up a new coating plant in Brazil, which is expected to be commissioned in 2Q22. For FY2021, the company expects the division’s net sales to be slightly above and EBIT margin below its 2020 levels.
Chemistry: The company expects the size and pace of the global economic growth to dictate the business trends in the Chemistry Division. The division is expected to clock higher net sales and double-digit EBIT margin.

Group: Group net sales are expected to increase as a whole, while EBIT is expected to be substantially below at single-digit figure. However, the group results are expected to come slightly positive.

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 ~40% 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 0.8x (FY2022E), a significant 43% 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 the 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. Equally complimenting it will be the Chemistry Division which is expected to benefit from the emerging trends that the company is looking to tap through timely capacity expansion. Operations aside, management’s focus on offering sustainable solutions and simplifying the corporate structure should improve investor sentiment going forward. Moreover, we expect the cost optimization initiatives to offer support to the company’s stock price.