Recovering its footing
Summary
CPH Chemie + Paper Holding AG (the group) is a diversified industrial group, engaged in manufacturing paper, chemical products and packaging films. CPH generates the bulk of its revenue from the paper division, with sales in Switzerland and neighbouring Europe. CPH is the number one player in the Swiss market for production of newsprint and the country's only producer of magazine paper. The Packaging division manufactures high barrier films for the global pharmaceutical industry and is the third-largest supplier of PVdC coated high-barrier films. The Chemistry division produces molecular sieves and has substantial global exposure. In FY2013, the group's sales stood at CHF 481mn with an employee base of 859.
Exposure to high-growth markets to bolster revenues
CPH's two businesses - Packaging and Chemistry - have a strong presence in high-growth markets. The Packaging division has a plant in the US, where the pharmaceutical packaging industry is expected to grow at 5.9% CAGR over the next five years. CPH is also setting up a manufacturing facility in China to cater to the strong Asian market, which is expected to register double-digit growth over the 2013-2018 period. Similarly, CPH's Chemistry division, which manufactures zeolites that are used in oil & gas and petrochemical industries, has an operating facility in the US. Through this, the group is well placed to cater to the world's largest shale exploration region - North America. With shale exploration expected to reach its peak over the next few years, the global zeolite market is forecast to grow at over 7% CAGR over 2013-2018, with most of the growth coming from the Americas. CPH's presence in such high-growth markets should boost its top-line growth over the medium-term.
Investments in technology to boost margin expansion over long-term
The Paper division, which is facing stiff competition, aspires to be the cost leader in its relevant graphic paper markets. With an aim to improve operating margins by reducing costs, CPH has replaced its old PM5 machine with a new PM7 machine, which produces three times the quantity of paper with no additional manpower. The machine utilises recycled paper and waste-wood, reducing the input costs. Further, the PM7 machine consumes considerably lesser energy than the previous set-up, bringing down the energy costs as well. The machine, which was installed in 2010, is in the ramp-up stage and will commence production at its full capacity in 2015. We expect the new machine to help turn CPH's EBIT margin positive this year and raise it close to 7% in FY2016E.
Healthy H1 2014; positive outlook over the medium-term
Despite continuing pressures on the Paper division, a marginal price rise coupled with a rise in volumes of high-margin products resulted in favourable H1 2014 sales (+1.1% y/y) for the division. The Packaging division too reported a rise in sales (+0.5% y/y) on the back of strong demand from Asia. The demand from Americas helped support the Chemistry division, although price pressure in the domestic market more than offset the growth, resulting in a slight dip in sales y/y. However, the cost management measures undertaken by CPH's largest segment - Paper - helped the group report positive EBIT margin (3.8%) for the first time since H1 2009. Turnaround of the Paper business remains a major break-through for the group as the measures undertaken by the management have begun to fructify. We expect FY2014 to be better y/y on the back of a healthy H2 in which we anticipate all three businesses to improve their bottom-line performance. Moreover, the growing demand for the Chemistry division's products in the Americas and commissioning of the packaging film plant in China will offer further traction.
Current valuation level offers an entry opportunity
In view of CPH's diversified business profile, we have created a customised set of peers multiples based on the peer average of the group's business divisions. We have formulated the weighted average of these based on the sales contribution of the respective divisions. We have valued the CPH stock using DCF methodology taking into account that the company has operated through entire business cycle. Although the group is vulnerable to the structural changes in the Paper business and the subdued macroeconomic conditions in Europe; we believe the efforts undertaken by the management to revive the Paper business and strong growth potential in the other two businesses will deliver performance over the next few years. We believe the current price levels at which CPH is trading offers an attractive entry opportunity.
