Currency headwind shadows growth
- CHF/EUR floor abolishment weighs on 1H 2015 result
As a positive, product volumes growth was witnessed in all three of CPH's businesses (y/y) during the first half of 2015. However, the rise was overshadowed by a 13% y/y decline in the value of Euro vs. CHF. The pressure was augmented by the weakness in paper prices. With around two-thirds of the group's revenues coming from the Paper division, and Europe being the key end market, CPH's net sales declined 18% y/y. The group's revenues in 1H2015 stood at CHF 199.3 million. With a majority of operating costs incurred in CHF, EBIT came in red, a loss of CHF 18.5 million (EBIT margin: -9.3%). Consequently, CPH reported a negative net income of CHF 28.7 million. The numbers include a CHF 14.2 million one-off charge due to the currency impact of which CHF 6.5 million was taken at the EBIT level and CHF 7.7 million was charged to the financial result.
- Segmental performance
Paper: Dampened demand (decline by 5-10% y/y) in the newsprint and magazine paper industry and inadequate reduction in capacities resulted in further price declines for the division. Still utilization rates were decent, especially the newsprint section, increasing sales volumes y/y. However, the downward pricing pressure and the appreciation of CHF negatively impacted the division's revenues, which declined by 25.6% y/y to CHF 114 million. Cost optimization initiatives that management started in FY2014 in the form of transition to free energy market, Renergia cooperation, increased usage of recycled paper from the domestic market and employee base optimization, helped the division save costs to a tune of around CHF 10 million. As a result, the division reported a loss before interest and taxes (negative EBIT) of CHF 19.8 million in 1H2015 vs. an EBIT of CHF 8.8 million in the same period a year ago.
Packaging: While demand for packaging products was strong in the high-growth markets of Asia and Latin America, the important European markets saw a more sluggish development. Still, the division was able to achieve a nominal volume growth, but this was more than offset by the stronger CHF. Compared to the prior year period revenues declined by 9.6% to CHF 55.3 million. However, lower input material costs and a drop in employee headcount lead to better profitability. The division's EBIT rose 10.2% y/y to CHF 2.5 million, with EBIT margin improving ~80bps y/y to 4.5% in 1H2015.
Chemistry: Demand for the division's products catering to the natural gas, medical oxygen and zeolites production industries was strong during the first half 2015, boosting sales volumes. Geographically, developments were positive in North America and Asia while Europe continued to remain challenging. Improved sales volumes y/y and a diversified revenue base more than offset downward pressure from the CHF appreciation. The division's revenues climbed 5.1% y/y to CHF 30 million in 1H2015. Improved efficiency measures coupled with costs reduction in input procurements helped lower negative EBIT. Losses before interest and taxes (negative EBIT) stood at CHF 1.4 million in 1H2015 compared to a negative EBIT of CHF 1.5 million during the prior year period.
- Guidance
Paper: CPH has stated that its Paper division could benefit from higher magazine paper prices in Europe expected for the second half. However, forecasting newsprint paper price developments would be difficult at this time. On the costs side, the division would benefit from steam procurement from Renergia, which began in 2Q2015, and other measures. Taking all into account, the group expects the division's FY2015 revenues to decline y/y along with a negative EBIT.
Packaging: For FY2015, the group expects revenues to fall y/y; however, due to efficiency enhancement initiatives, management expects the division to report EBIT comparable to that of FY2014 levels. Regarding its expansion in China, CPH stated that construction works at the facility are moving in line with the planned schedule and production should begin around 2H2016.
Chemistry: CPH expects revenues and EBIT for FY2015 to be broadly in line with FY2014 levels as improved volumes are expected to be offset by price pressures from European and Chinese manufacturers.
- Changes to our forecasts
After a careful assessment of guidance, we have revised our revenue forecast for CPH. We now expect the group to report net sales of CHF 421.9 million vs. CHF 445.6 million forecasted earlier. On the similar lines, we anticipate a higher negative EBIT of CHF 24.1 million vs. a negative EBIT of CHF 18 million.
- Valuation and conclusion
CPH's lower sales y/y has been primarily the a result of the strong appreciation of the CHF as well as lower paper prices, which offset higher sales volumes. Structural changes in the paper industry across Europe has also been a downward contributing factor. These coupled with a majority of expenses being incurred in CHF resulted in a negative EBIT despite having cost savings of approximately CHF 30 million (y/y) coming from improved productivity, higher-margin products, transition to free electricity market and Renergia initiative. This is assuming the exchange rate and paper prices remaining constant.
CPH currently trades at 1% discount (3-year historical forward P/S). However, lower EBITDA and net income on account of a majority of costs incurred in the appreciated currency has led to a premium of 109% and 40% based on 3-year historical forward EV/EBITDA and P/E.
While the challenging developments especially at the Paper division have been reflected in the share price trend, we believe it will take some patience for the shares to recover in the medium-term.
