This report is published by Research Dynamics, an independent research boutique
On the road to profitable growth
2016: moderate revenue growth with positive EBIT
CPH Group's revenues for the full year increased by 3.5% y/y to CHF 434.8mn in 2016 on account of solid performance in the Packaging and Chemistry segments. The company's sales numbers came in below our expectations due to a muted 2H2016. At the operating level, the company posted a profit of CHF 5.9mn for 2016, compared to a loss of CHF 21.8mn in 2015. The net loss of CHF 7.7mn in 2016 compared to a net loss of CHF 33.1mn in 2015, where in 2016 there was a onetime extraordinary expense of CHF 4.4mn on account of the restructuring of the Uetikon operation. The tax expense of CHF 4.3mn in 2016 was significantly higher compared to CHF 1.0mn in 2015. The Packaging segment reported an 8.7% y/y growth in revenues to CHF 119.3mn, while the operating profit stood at CHF 9.0mn, up 53.7% y/y due to increase in volumes and strong sales in the Asian markets. Revenues from the Chemistry segment rose by 10.9% y/y to CHF 69.3mn, mostly attributable to the acquisition of the ALSIO operations, and the division returned to positive EBIT of CHF 1.6mn compared to a loss of CHF 1.8mn in 2015. Paper remains the largest segment for CPH with 56.6% contribution to total revenues in 2016. The market is in significant oversupply and we believe there is a high probability of capacity reduction both in magazine as well in the newsprint segments. Although volumes were down close to 5% in 2016, CPH managed to maintain its sales with price mix and currency improvement, at CHF 246.2mn more or less stable (-0.6%). The division reported negative EBIT of CHF 5.8mn.
Efforts should start yielding results
In 2016, the company has taken a number of strategic decisions which we feel sets the stage for it to evolve into a more internationalized and diversified Industrial Goods company. CPH has begun manufacturing operations in its China-based Chemicals' (ALSIO) and Packaging plants. This is not only going to help the company in reducing its operating costs but also to increasingly realign the cost base with that of revenues. It also helps the company to better cater to the fast growing Asian markets. Further, the Chemistry division is building a production facility in Zvornik in Bosnia and Herzegovina and will relocate a further part of the Uetikon site's production and management to Rüti within the Canton Zurich. These developments are expected to lower the company's overall production costs and result in improved margins. It would also lower the impact of currency fluctuations as it reduces the exposure to the CHF.
An encouraging year ahead
While we expect the Paper division to remain at the current sales level, we look for mid to high single-digit growth with better margins compared to 2016 in both the Packaging and Chemistry segments. The company plans to invest CHF 36mn in 2017 which will help in further efficiency gains in the different divisions, particularly in Chemistry, in the future. We expect the company to return to profitability at the net level in 2017 given the market dynamics remains largely stable. On the EBIT level, we look for contributions of CHF 8.2mn from Packaging (lower than in 2016 considering some start-up costs for the Suzhou plant in China), CHF 2.8mn from Chemistry and CHF 0.2mn from the Paper segment.
Valuation: market is yet to price in the operational improvements
CPH has outperformed the SPI Index by c.35.0% since the beginning of 2016. On an absolute basis, CPH shares are up 38.5% since 2016. In our view, the stock has reacted positively successful acquisition of ALSIO and sale of the Uetikon site. At current price levels, CPH shares trade at a discount of 42% to its peers on P/S basis. Similarly, CPH is trading at a discount of 7% to its peer average EV/EBITDA. We expect the company to improve its earnings in the near to medium-term. Also, with newsprint prices possibly inching up and the Chemistry and Packaging segments posting profitable revenue growth, CPH should be able to reverse its losses in the near term. CPH trades at 23.0x 2018 P/E close to its peer average of 23.3x.
