Gratifying 2014 results, challenging outlook

FY2014 numbers in line with guidance

CPH's FY2014 results were broadly in line with the expectations set by the group (guidance given on occasion of 1HFY2014 results), indicating management's accurate reading of the markets in which it operates. CPH reported net sales of CHF 492.5mn, a modest rise of 2.3% y/y, as all the three operating segments posted revenue growth for the first time since FY2011. Despite price pressures, EBITDA amounted to CHF 50.8mn and operating profit (EBIT) turned positive and stood at CHF 16mn. Consequently, EBIT margin for the year returned to black as guided by management.

Execution of plans yield solid results

CPH reported a healthy set of numbers for FY2014 as the group's key division - Paper - revenues jumped 2.9% y/y despite a decline in paper demand (-6.3% in newsprint and -3.2% in magazine papers) due to ongoing structural changes in the industry. The Chemistry division revenues rose by 1.7%, the first y/y annual growth in the last three years, as shale gas boom boosted the division's sales. The Packaging division's revenues too moved northward as demand for its products grew in North and South America. The group's EBIT margin was positively impacted by a superior operating performance (y/y) by the Paper division, as the plant was able to operate the PM4 machine at higher profitability by solely utilizing it for higher-margin magazine paper. Further, the group saved costs executing its plans to source a large proportion of recovered paper locally and by moving to the free electricity market.

A shift to high-growth markets to reduce dependency on Europe

CPH's Packaging division derived a significant 66% of its revenues from Europe (including Switzerland). However, despite being well positioned in the region, the group continues to face stagnancy on account of a low growth rate. To enhance its presence across the globe and enhance sales, the group has decided to set-up a coating plant in China. CPH has invested CHF 4.4mn in FY2014 and plans to spend around CHF 20mn towards the China project. The plant, which is expected to be commissioned in FY2016, will enable the group to cater to the high-growing Asian market and improve EBIT margin on the back of low cost base over the medium term.

De-peg of CHF vs. EUR to be a near-term headwind

The Swiss National Bank's sudden decision to scrap the EUR/CHF floor of 1.20 created ripples among the Swiss companies, as the structural change would negatively impact their revenues and earnings. CPH too would be impacted as the group derives a significant portion of its revenues from global markets (ex-Switzerland). Further, with ~70% of expenses being incurred in Switzerland, cost base remains high. Given the scenario, we have revised our revenues and EBIT estimates for FY2015 downward.

Attractive entry point at current valuations

Despite the currency headwind, CPH remains attractive on account of its balanced focus on cyclical and defensive businesses. CPH currently trades at a P/S multiple of 0.7x (FY2015), which is at a 19% discount to weighted average of division peers. Given the management's focus on expanding high-growth markets, we believe a discount to its peers is unwarranted, despite 2015E being a challenging year. Further, a 20-for-1 split to be proposed by the management would enhance liquidity of the stock in the market.

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