Research Dynamics / Key word(s): Research Update
This report is published by Research Dynamics, an independent research boutique
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
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.
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