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


The fruits of execution are coming through

2017: Revenue growth across segments
CPH Group's revenues for the full year increased by 8.0% y/y (organically 6.5%) to CHF 469.8mn in 2017, which were ahead of our expectations, driven largely by higher sales across all divisions. Gross profit, however, declined to CHF 161.1 (-4.2% y/y), adversely impacted by substantial rise in prices of recovered paper. The company continued its efforts to enhance its efficiencies to counter the adverse trend of rising prices of key raw materials across segments. Operating profit halved at CHF 2.9mn, as compared to CHF 5.9mn in 2016, even as total operating costs declined to CHF 127.4mn (-3.0% y/y). Net profit of CHF 16.2mn was positively impacted by extraordinary income of CHF 22.8mn arising from the sale of real-estate in Perlen and Full-Reuenthal during the year. Tax expense of CHF 3.0mn (vs. CHF 4.3mn) in 2017 declined as the company benefited from tax-loss carry forwards of prior years. Encouragingly, the Packaging segment reported 9.2% y/y growth in revenues to CHF 130.2mn, while operating profit stood at CHF 9.6mn, up 6.1% y/y due to increase in volumes and strong sales in the higher-barrier films. Revenues from the Chemistry segment rose by 8.8% y/y to CHF 75.5mn, largely attributable to organic growth, while EBIT more than doubled to CHF 3.8mn compared to CHF 1.6mn in 2016. The Paper division grew on the back of higher volumes (+8%) despite of headwinds pertaining to significant oversupply and reduction in overall demand for the final products. Sales increased by 7.3%. Still, the division reported a negative EBIT of CHF 12.3mn.

Internationalization and cost efficiencies, the key to growth
In 2017, the company implemented number of strategic decisions which had been initiated in prior years. In our opinion, the corresponding steps transform the company into a leaner and fitter organization to further pursue its goals of becoming a more internationalized and diversified Industrial Goods company. Full integration of its China-based Chemicals' (ALSIO) and Packaging plants have allowed the company to transfer significant parts of its operations to China, thereby achieving lower costs and freeing other facilities to produce higher-value products to further boost its prospects. This is not only going to help the company to reduce its operating costs but also to increasingly realign the cost base with that of the revenues. The relocation of production from a further part of the Uetikon site's production to the facility in Zvornik in Bosnia & Herzegovina as well as to Rüti within the Canton Zurich, including management, should also lead to a further increase in profitability in the medium term.
 

Chemistry and Packaging divisions to offset Paper underperformance
CPH continued its efforts to grow its Chemistry and Packaging divisions, in a bid to reduce its dependence on the Paper division, evidenced by acquisitions such as ALSIO, Armar and Sekoya in the recent past. While these acquisitions should help CPH to expand its footprint outside Europe, they will also aid drive cost efficiencies in the medium to longer term. We expect the Paper division to remain stable with marginally breaking even in 2018; against this, the Packaging and Chemistry divisions should be able to achieve mid- to high single-digit growth with better margins compared to 2017. On the EBIT level, we expect CHF 10.4mn from Packaging, CHF 4.6mn from Chemistry and CHF 0.3mn from Paper.
 

Valuation: outperformed the benchmark by a wide margin
CPH has outperformed the SPI Index by 54pp since the beginning of 2017. On an absolute basis, CPH shares are up 69.6% since 2017 as the company successfully delivered on its business reorganization plans. At current price levels, CPH trades at a discount of 54% to its peers on P/S basis. Similarly, CPH is trading at a premium of 14% to its peer average EV/EBITDA. We expect the company to improve its earnings in the near to medium-term. Also, with newsprint prices possibly inching up and the Chemistry and Packaging segments posting profitable revenue growth, CPH should be able to further improve its performance.