This report is published by Research Dynamics, an independent research boutique

Profitability soared on turnaround in the Paper division and strong results in Packaging

Robust 1H2018 results, with top line growing in double digits
CPH reported a healthy set of numbers with top line increasing by 14.0% YoY to CHF 264.1mn, driven by higher capacity utilisation and stable fixed cost across the divisions. This resulted in a significantly higher operating leverage which was coupled with favourable business trends and good market conditions. Group EBIT improved noticeably to CHF 27.8mn from CHF 1.1mn in 1H2017, and thus the EBIT margin was considerably higher at 10.5% compared to 0.5% in the same period last year. Although all divisions reported a positive EBIT for the period, the primary reason for the overall growth in profitability was the robust performance at the Paper division, which could finally capitalize on the long-lasting consolidation of the paper industry. The Paper division reported a strong EBIT of CHF 14.8mn compared to CHF -6.0mn in 1H2017 and thus the margin improved to 10.0% from a negative 4.7% during the same period last year. The company overall reported a net profit of CHF 22.6mn against a negative result of CHF 2.2mn, corresponding to a margin of 8.6% compared to -1.0% in 1H2017.

Increase of full-year guidance
On the basis of the very good first half-year results, the group expects to report significantly higher net sales and consolidated earnings for the full year 2018, assuming a benign currency environment. According to management, the newly acquired businesses of Armar and Yusheng in the Chemistry division, APS (former Papierfabrik Utzenstorf) in the Paper and Sekoya in the Packaging will have a positive impact on overall sales volume of the company.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. In the DCF analysis, we have used a market risk premium (MRP) of 8.2% and a beta of 0.9. Being conservative, we have considered a higher risk-free rate of 0.5% compared to the current 10 year government bond yield of 0.04% as we believe it is not sustainable in the long term. Based on our assumptions, we arrive at an intrinsic value of CHF 101.2 per share (vs. previous target of CHF 80.5), giving it an upside potential of 14.3% compared to current levels.
We have used three parameters - EV/EBITDA, P/S and P/E - to analyze the relative valuation of the Group. Initially, we have calculated the peer average of CPH's individual divisions, and then taken a weighted average of these based on the sales contribution of the respective division. Given its diversified business model, this consolidated peer average is most comparable to CPH's valuation multiples.
CPH currently trades at a P/S multiple of 1.0x (FY2018E), a significant 51% discount over the weighted average of division peers.
We believe in the medium-term, the stock could trade at higher multiples on account of an increased contribution of sales and operating profits expected out of the Asia-Pacific region and higher operating efficiencies from the new production facilities, as well as from the positive momentum the company is experiencing after years of restructuring processes. The Paper division is finally bearing fruits from its perseverant strategy, outpacing competitors with a lead in technology and operational excellence.