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


On road to recovery

- Strong 1H 2016 results: Posting an operating profit

CPH reported a healthy top line growth of 10.1% y/y for 1H2016, as sales reached CHF 219.5 million, driven by higher sales volumes across all divisions as well as the acquisition of China-based Jiangsu ALSIO Technology Co. Further, the segments also reported improved margins, thus the company reporting profits at the operating level. The group's EBIT stood at CHF 6 million in 1H2016 compared to an operating loss of CHF 18.5 million in 1H2015, supported by sales of higher margin products as well as cost reduction efforts taken by the government. The 1H2015 results were primarily impacted by the sharp appreciation of the Swiss Franc, which had a one-off negative impact on 1H2015 earnings. However, despite improved operating performance, the company's bottom line remained in the red in 1H2016, with a net loss of CHF 2.6 million.

- Segmental performance

Paper: The paper industry showed signs of stabilizing as the decline in newsprint and magazine paper demand slowed down to around 5% in 1H2016. Capacity utilization rate in the newsprint division remained strong in 1H2016, whereas the high-margin magazine paper capacities were underutilized in 2Q2016. Paper prices also recovered slightly in 1H2016 from the second half of 2015. As a result, the Paper division's revenue grew 7% y/y to CHF121.9 million. Management's efforts on efficiency improvements led to continued fall in carbon emissions, which reduced to almost half of the level of five years ago to 114 kilos of carbon dioxide per ton of paper produced. The higher sales and lower costs led to significant improvement at the operating level. The segment almost reached break-even with a small loss before interest and taxes (negative EBIT) of CHF 0.9 million in 1H2016 vs. a loss of CHF 19.8 million in the same period a year ago.

Packaging: Revenues in the Packaging division were primarily driven by strong growth in Asia and North American markets. Though the European pharmaceutical market remained stagnant, CPH was able to increase its market share in the region. The segment's sales grew 13.1% y/y to CHF 62.6 million, supported by higher sales volumes. The new production plant in Wujiang, China began operations in 2Q2016, which would have supported volume growth. Further, the division's cost reduction programme "Smart Move Forward" continued to enhance efficiency. As a result of these initiatives, the Packaging division posted a 146.6 y/y jump in EBIT to CHF 6.1 million. The EBIT margin more than doubled to 9.8% from 4.5% during 1H2015. The rise in margins was also supported by increased sales of high margin products.

Chemistry: Demand for the division's products catering to the natural gas, medical oxygen and zeolites production industries was modest during the first half 2016. The company was able to increase its market share on the back of intensified sales efforts. The segment's sales rose 16.6% y/y to CHF 35 million, supported by increased sales volumes. Revenues were also boosted by the acquisition of China-based molecular sieve manufacturer Jiangsu ALSIO Technology Co. Sale of high margin products increased, resulting in improvement in margins. The segment was able to post an operating profit with EBIT standing at CHF 0.5 million, improving from a loss before interest and tax of CHF 1.4 million in 1H2015. EBIT margin improved from -4.6% in 1H2015 to 1.3% in 1H2016.

- Guidance

Paper: The newsprint paper price is likely to increase slightly in 2H2016, while magazine paper prices are expected to remain under pressure for the rest of the year. Management will continue on its efforts to achieve cost leadership. Taking all into account, the group expects the division's FY2016 revenues to increase y/y and breakeven at the operating level.
Packaging: Ramping up of production from the recently commissioned China manufacturing facility and transferring of orders to the China facility (from Switzerland) will drive sales growth and margin improvement. For FY2016, the group expects revenues to increase y/y and a substantial improvement at the EBIT level.
Chemistry: CPH expects revenues to grow in FY2016 and to achieve a positive EBIT. The integration of ALSIO is expected to enhance efficiency and improve margins. Production of molecular sieves will be transferred from Uetikon to the division's Chinese and US plants in 2H2016.

- 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 458.1 million vs. CHF 441.4 million forecasted earlier. On similar lines, we anticipate a higher EBIT of CHF 12.1 million vs. an EBIT of just CHF 1 million.

- Valuation and conclusion

CPH currently trades at 10% discount to its 3-year historical forward P/S. However, restructuring expenses incurred in 2016 had led to lower earnings expectation for 2016. Nevertheless, looking at the EV/EBITDA multiple, the company trades at a 18% discount to its peers on 2016 estimates and 25% discount to peers on 2017 forecast.

With operating profit expected to grow at a CAGR of more than 30% between 2016E and 2019E, we believe the stock should command a higher EBITDA multiple.