Report on CPH by Research Dynamics: Event Update

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

Adjustments to FY20 earnings outlook

CPH Group to benefit from significant one-off effects
CHP Group yesterday announced its plans to transfer some of its Perlen site's land assets to a newly to be founded real estate subsidiary, Perlen Papier Immobilien AG. With the completion of this transaction, the group will be able to clearly distinguish between its operating and real estate activities. This transaction, which is to be executed at market values, will allow the CHP Group to offset CHF 97mn of tax losses carried forward from previous years, resulting in an expected deferred tax income of ~CHF 12mn. This amount, along with release of provisions for environmental protection measures from the Uetikon site, is expected to generate a non-recurring income totaling ~CHF 26mn for FY20e. Thus, the CPH Group now expects to report net earnings of ~CHF 40mn for FY20e as against the low-double-digit millions guidance provided earlier.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 87.9 per share comes out the same as our previous target price (CHF 87.9), implying an upside of 35% from the previous closing price. For relative valuation, since the Group operates in three entirely different divisions, we compare each of CPH's divisions with different sets of relevant industry peers. We have employed three parameters - EV/EBITDA, P/S and P/E - to analyze the relative valuation of the Group. CPH currently trades at a P/S multiple of 0.8x (FY2021E), a significant 35% discount to the weighted average multiple of division peers.

We remain encouraged by management's focus on diversifying the offerings towards more remunerative businesses and regions. That said, in the short-term, we expect uncertainties to continue during the reminder of 2H2020 and into 2021 as economic activity is likely to pick up only gradually. Specifically, as Covid-19 has once again started resurfacing in major European countries, the Paper division may face unexpected demand pressure in 4Q20 due to potential restrictions on economic activities. Thus, the division may be affected by similar challenges than as of mid-March and into 2Q20 when demand for newsprint and magazine paper significantly. Accordingly, we have lowered our FY20e revenue forecast for the Paper division. However, in the medium to long term, as business activity is expected to pick up steam, we expect the valuation discount to narrow and the stock to witness a revaluation.
We see multiple factors driving the improvement in valuation, which includes growth prospects in key markets, operating efficiency improvements from new production facilities, and expansion of the Packaging and Chemistry divisions. The Paper division, which will be impacted in the short-term due to the weak economic environment in Europe, should benefit from local market, cost leadership, cost saving initiatives, advanced technology and continued operational improvements in the long-term. The business environment continues to remain challenging due to overcapacities and decreasing demand for newsprint paper. However, over time, tough market conditions may push marginal paper producers out of business which should lead to reduced capacities and aid a recovery in paper prices thereby benefiting efficient and leading market players like CPH. Moreover, we expect that the group-level efficiency optimization initiatives - together with the further strategy implementation of increasing presence in growth markets outside of CHF denominated cost structures and paper exposure - should offer support and upside to the company's stock price.