Research Dynamics
Research Dynamics: Report on CPH: FY2023 earnings update

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

Resilient performance amidst challenges

Decline in sales and profitability compared to the previous year due to an exceptionally high base effect

In FY2023, the CPH Group (CPH) achieved net sales of CHF 624.0 mn, corresponding to a 14.0% decrease year-on-year (YoY), or -10.4% when adjusted for currency impacts. While the Chemistry and Packaging divisions achieved record sales, the Paper Division saw a notable decline in net sales. EBITDA for the Group amounted to CHF 102.0 mn, down by CHF 29.0 mn compared to previous year while the corresponding margin dropped to 16.3% (FY2022: 18.1%). After accounting for depreciation and amortization of CHF 19.0 mn, Group EBIT was CHF 82.8 mn, while the corresponding margin declined to 13.3% (FY2022: 15.5%). The net after-tax result of CHF 79.9 mn compares to CHF 101.0 mn reported in FY2022. In October 2023, CPH Group utilized its existing cash balances to fully settle its CHF 100.0 mn corporate bond upon maturity. In FY2023, CPH invested CHF 35.0 mn in fixed assets to boost capacities in its Chemistry and Packaging divisions and improve efficiency across all three divisions. Cash flow from operating activities amounted to CHF 110 mn (FY2022: CHF 98.0 mn) and free cash flow rose from CHF 68.0 mn to a CHF 92.0 mn.

Segmental performance

Paper: As expected, net sales of the Paper division in FY2023 were lower than in the previous record year, mainly attributable to lower sales volumes and intense price pressure. At CHF 262.0 mn, the decline was 31.7% YOY (constant currency: -29.1%) The lower topline resulted  in an EBITDA decline to CHF 36.6 mn (FY2022: CHF 80.6 mn) while the corresponding margin reduced to 13.9% vs 21.0% in FY2022. Divisional EBIT was CHF 30.5 mn (vs FY2022: 75.1 mn) and the corresponding margin declined to 11.6% compared to 19.5% year ago. Despite the industry demand down by 21.0% in newsprint and -24% in magazine papers in FY2023, the CPH sold 371,000 tonnes of paper in 2023. Additionally, it increased its market share in Europe in an environment marked by fierce price competition.

Chemistry: Net sales increased 12.6% YoY to CHF 124 mn mainly on strong demand for molecular sieves in industrial and energy sectors, as well as for deuterated products in pharmaceuticals, laboratories, and OLED displays. This was slightly offset by declines in demand from the construction and medicinal sectors. The divisional EBITDA reached CHF 22.1 mn, marking a 15.2% YoY increase, with the corresponding margin expanding 40 bps to the high level of 17.8%. The margin growth was supported by expanded capacities at the Rüti site and improved efficiency in US and Chinese operations. In FY2023, EBIT amounted to CHF 15.7 mn, a 14.1% YoY increase and a new record high. The EBIT margin was 12.7%

Packaging: In FY2023, the Packaging division reported net sales of CHF 237.3 mn, an increase of 2.9% YoY as it operated its production facilities at near-full capacity, benefitting from a surge in orders from the previous year. As pharmaceutical procurement returned to normal, order volumes rebounded to pre-COVID levels. The division opened new slitting facilities in Germany and Brazil, thus expanding capacities to address future demand. With high-capacity utilisation and a diverse product mix, the EBITDA increased by 36.7% YoY to CHF 42.8 mn with corresponding margin of 18.1% (FY2022: 13.6%). While the EBIT surged by 52.6% to CHF 36.1 mn, with the corresponding margin expanded by 495 bps to 15.2%.

Outlook for FY2024

With ongoing interest rate hikes aimed at curbing inflation and recent market uncertainties, the outlook for broader business prospects is currently uncertain. Economic instability persists amid ongoing uncertainties and geopolitical conflicts in Eastern Europe, the Middle East, and Asia. These factors further complicate the economic landscape, presenting challenges for businesses as they navigate through FY2024. Consequently, management expressed uncertainties in its guidance, acknowledging the complex and challenging environment the businesses are facing.

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. Our intrinsic value decline to CHF 92.6 per share over the previous target of CHF 97.8 and implies an upside of 6.9% 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 analyse the relative valuation of the Group. CPH currently trades at an EV/EBITDA multiple of 5.3x (FY2024e), a significant 47.0% discount to the weighted average multiple of division peers.

The global economic outlook indicates a gradual recovery, with the IMF projecting a 3.1% growth in global GDP for 2024. However, near-term challenges loom, as persistent inflationary pressures and geopolitical tensions in Eastern Europe, the Middle East, and Asia may impact the company’s trajectory. Furthermore, limitations in raw material availability and constrained pricing dynamics are anticipated to exert downward pressure on margins. Although over the past decade the performance of the Paper Division was volatile and demanding, the supply side squeeze should keep the division’s profitability under pressure. Moreover, the operating results of the Packaging and Chemistry divisions – both benefitting from somewhat higher visibility – are expected to remain resilient. A better bottom line at Group level and the cost optimisation efforts are expected to result in a healthy performance of the company’s stock price.