CPH Chemie + Papier : Investor Day update 16 September 2022 (pdf, 233kb)

This report has been issued for information purposes only and is not intended to constitute investment advice. It is based on estimates and forecasts of third parties regarding revenues, earnings and business developments. Such estimates and forecasts cannot be independently verified by reason of the subjective character. CPH Chemie + Papier Holding AG gives no guarantee, representation or warranty and is not responsible or liable as to its accuracy and completeness.

This report is not a prospectus within the meaning of art. 652a CO or art. 27 et seq. of the SIX Listing Rules. This document is neither an advice on investment, nor a recommendation or invitation for purchasing, holding or selling any securities, money market instruments or derivatives and no investment decision should be based on this report. This report speaks as of its date. Neither CPH Chemie + Papier Holding AG nor Dynamics Group AG assume any responsibility to up-date the report.

CPH Chemie + Papier Holding AG

Switzerland | Industrial Goods & Services

2022 Investor Day update

16 September 2022

Company Data

Price:			CHF 71.80
Market Cap:			CHF 430.8mn
Free Float:				39.7%
No. of shares:				6.0mn
Avg. traded volume (30 day):		509
Bloomberg:			CPHN SW
Reuters:			CPHN-EB
ISIN:			CH0001624714
Source: SIX Swiss Exchange and Bloomberg
Share Price Development
120
110
100
90
80
Jun-21	Sep-21	Dec-21	Apr-22	Jul-22
		CPH	SPI
Source: Bloomberg
Key Financial Data
	2020	2021	2022E	2023E
Sales	445.2	496.7	707.4	645.3
EBITDA %	12.4%	5.2%	14.7%	11.9%
EBIT %	5.5%	(0.5%)	11.9%	8.6%
Net Margin %	10.5% (30.5%)	10.8%	7.0%
Basic EPS	7.82	(25.26)	12.74	7.49
Diluted EPS	7.82	(25.26)	12.74	7.49
DPS	1.80	1.30	1.30	1.80
Equity Ratio %	66.8%	55.2%	58.1%	62.0%
Capex	(13.5)	(19.4)	(51.6)	(28.9)
P/Sales	1.0x	0.9x	0.6x	0.7x
P/E	9.7x	NM	5.9x	10.1x
EV/EBITDA	8.5x	18.3x	4.5x	6.1x
Source: Research Dynamics, Company data
Next Events
Baader Helvea Swiss Equities	13 Jan 2023
conference
Annual Results 2022		21 Feb 2023
Ordinary General Meeting	14 Mar 2023

Analysts

Doris Rudischhauser [e-mail]

Alexandre Müller [e-mail]

Tel: [phone]

www.researchdynamics.ch

Rising demand for products in the Chemistry division to drive future growth

CPH hosted its investor day on 13 September 2022 where CPH highlighted its continued focus on implementing differentiation strategies in its Chemistry and Packaging division, while pursuing the cost leadership strategy in the Paper division to mitigate an unfavourable operating environment. The focus of this year's event was on the Chemistry division, which is a leading global supplier of molecular sieves (zeolites), chromatography gels and deuterated products, all trading under the Zeochem brand. The division is convinced that the demand for molecular sieves for the purification of ethanol, natural and industrial gases, and concentration of industrial oxygen will continue to rise in the future owing to megatrends in Health, Energy and Mobility. As a whole, the Group remains committed on implementing strategic measures such as expanding its footprint outside Europe and trimming down the exposure to the Swiss franc in currency terms by expanding production capacities outside Switzerland. The closure of the Uetikon site has also reduced dependence on the Swiss franc in currency terms.

Chemistry division to provide the next leg of growth

1. Strategy enabled growth: CPH is internationalizing its Chemistry division's operations by strengthening and establishing its distribution channels in Latin America and the Middle East, and developing new markets in Asia and in North and South America in line with its strategy of increasing the proportion of group net sales generated outside Europe. Through investments in distribution and capacities, the company aims to gain further market shares from competitors.
   The Chemistry division's net sales have registered a CAGR of 50% over FY2015-FY2021, whereas EBIT margins have increased significantly to 16.1% in FY2021 vs. -2.9% in FY2015, supported by Zeochem's strategic realignment since FY2014.
2. Structural megatrends to drive long-term growth:

• Healthcare: The healthcare markets in most countries are growing 7% faster than their GDP, and the value of these markets is expected to quadruple to USD 20bn by FY2030 (vs. FY2010). This trend should provide long-term growth opportunities for Zeochem, which manufactures high-performance molecular sieves for the production of medical oxygen, chromatography gels to purify APIs and neutraceuticals, and methanol- and deuterium-based solvents to optimize the dosages of medications for the human body.
• Energy: The rising switch from fossil to sustainable energy sources globally to reduce CO2 emissions for countering climate change should increase the demand for Zeochem's products especially for molecular sieves, which are used in the purification of natural gas, in oxygen concentration processes and in producing ethanol as an alternative energy source.
• Mobility: With the rise of a global mobile culture, changes through new products and services and the future use of transportation, Zeochem's offerings that ensure the transition from oil and coal to renewable energy technologies, and products which are used in vehicle braking systems and interiors of various transport vehicles are in huge demand.

1. Levers identified for further expansion: The company is also at the forefront of innovation and remained focussed on developing high-valueproducts (Li, binder-free,DMSO, methanol) as well as building new applications for Zeochem products (spacers/Purmol, OLED/DMSO) which should continue to generate higher sales in new markets.
2. Zeochem: Extending the lifespan of OLED displays: With rising consumer preference for OLED displays in TVs (proportion of new televisions featuring OLED screens rose from 25% to 40% over mid-2020to mid-2021),smartphones, laptops and motor vehicles owing to its technological superiority in the display of colours and efficiency, the demand for deuterated solvents is increasing. The use of deuterated solvents will extend the lifespan of new generation OLEDs (the market is expected to further see 13% per annum growth over the next 5 years) which should benefit CPH since Zeochem has >75 years of experience in the silicate chemistry sector and is one of the three leading providers of such products worldwide.

Important disclosures are on the last page of this report. CPH Chemie + Papier Holding AG is a research client of Research Dynamics. The equity research reports are prepared for information purposes only.

CPH 2

Switzerland | Industrial Goods & Services

To meet the growing demand, CPH's Chemistry division is building a further deuterated dimethyl sulfoxide distillation plant at its Rüti site in Switzerland, which should come into operation in 2022.

Broad-based revenue growth across all divisions in 1H2022

For 1H2022, CPH's net sales increased 47.7% YoY to CHF 360mn, driven by growth in all three segments thanks to strong demand, despite the adverse impacts of the Ukraine war, COVID related lockdowns in China and challenges in raw material procurement and transportation logistics. Despite the substantial rise in raw material prices, transport and energy costs, the company's EBIT increased significantly to CHF 51.9mn (1H2021: CHF 5.7mn) and the corresponding margin expanded to 14.4% (1H2021: 2.4%).

The Paper division's revenue growth improved significantly by 78% YoY, mainly thanks to higher paper prices driven by a demand imbalance as a result of lower paper production volumes due to permanent capacity closures and a long strike at one of the Paper division's competitors. The Chemistry and the Packaging divisions registered 18.9% YoY and 27.5% YoY growth, respectively. During 1H2022, the company's Paper and Packaging divisions reversed their EBIT margin declines of the prior-year period, while the Chemistry division's EBIT fell 1.6% YoY to CHF 7.3mn and its corresponding margin contracted to 13% (1H2021: 15.7%).

Outlook

Group: Management expects FY2022 net sales to be substantially higher than in FY2021 in all three divisions. Operating and net result both are expected to be in the high double-digit millions.

Chemistry: With additional capacities in the US coming into operation at its Louisville site, the company expects to report double-digit net sales growth in FY2022. However, due to rise in raw material and transport costs, operating margin is expected to fall somewhat short of its high prior-year level.

Paper: Although net sales are expected to be well above prior year levels for the FY22 thanks to continued high paper prices, European demand for newsprint and magazine papers will continue to decline over time and production volumes will diminish as a result of capacity reductions. Moreover, higher recovered paper and energy prices will put pressure on operating margins in 2H2022.

Packaging: Despite the new coating plant in Brazil commencing its operations and introduction of mono-material PVC blisters in the market in 4Q22, the division's net sales are expected to slow down in 2H2022 as the Brazilian operations are only expected to contribute to revenues in 2023 and beyond. Operating margin is likely to be broadly maintained at its 1H2022 levels.

Reaping benefits from the successful implementation of the long-term strategy

Reduce dependency on the Paper division: Long term structural headwinds, commoditized nature of the business, geographical barriers and high fixed costs have forced CPH to reduce its exposure to the Paper division by focusing on the more profitable Chemistry and Packaging divisions (2021: 54% share of total net sales vs. 2013: 36%). The shift in focus along with consistent execution of cost reduction programs in the Paper division has resulted in delivering substantial improvement in the group's EBIT (1H22: CHF 51.9mn vs. 1H2021: CHF 5.7mn).

Increasing sales proportion from outside Europe: CPH has been reducing its

concentration in Europe by expanding in high growth regions (2021: 33% of net sales were

made from outside Europe vs. 2003: 16%).

Limiting currency volatility: During 2009-2015, the appreciation in the Swiss franc by ~40% against the Euro impacted the group's net sales and earnings. To mitigate this, the company has been expanding production capacities outside Switzerland. Accordingly, the proportion of costs incurred in Swiss francs has come down to 34% in FY21 (FY13: 70%).

CPH 3

Switzerland | Industrial Goods & Services

Other Highlights

CPH concluded its supply agreement with waste incinerator company Renergia Zentralschweiz AG in 2015 for the provision of low-pressure steam to the Perlen paper factory. With 60% of the steam used in Perlen in FY2021 obtained from the Renergia waste incinerator facility and the rest was generated by CPH's own biomass plant, CPH has been able to reduce its dependency on gas which is aiding in reducing its carbon footprint, thereby reinforcing its competitiveness.

Implementation of the sustainability strategy:

Environment:

• Only 8% of the energy used at the end of FY2021 is derived from fossil fuels
• Own production of renewable energy is now at 205GWh per year, with further expansion potential
• Raw materials used consists largely of biomass (waste paper and wood)
• CO2 emissions per tonne of paper produced are 75% below peer group levels

Social:

• 50 apprentices in 10 professions underlines CPH's social commitment
• CPH boasts about having high diversity with employees from 35 nations
• Regular staff surveys and high proportion of long-serving employees (21% of staff have over 20 years of service) confirms CPH's attractiveness as an

employer

Governance:

• Board of Directors: most of the members are independent with growing proportion of women
• CPH has a stable shareholder base with 34% of equity held by main founding family shareholders, adding a long-term perspective on sustainable and solid business development
• Committed anchor shareholder as Chairman of the Board

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 97.7 implies an upside of ~36.1% from current levels. 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 analyse the relative valuation of the Group. CPH currently trades at a EV/EBITDA multiple of 6.1x (FY2023E), a significant 22% discount to the weighted average multiple of division peers.

The global economy is expected to recover only gradually, with the IMF slashing 2022e and 2023e forecast to 3.6%. In the short term, we thus believe ongoing inflationary headwinds and prospects of a slowdown may weigh on the company's prospects. On a positive note, the company was able to pass on the higher raw material and energy costs to the most extent. In the same line, the current shortages of raw materials like recovered paper are expected to stay on a high level over the next few months with the respective impact on costs. Although in the last couple of years the performance of the Paper division was not encouraging, the supply side squeeze should keep the division's profitability at an acceptable level. Moreover, the operating results of the Packaging and Chemistry divisions are expected to improve. A better bottom-line at Group level along with net sales increases and the cost optimisation efforts are expected to offer a required boost to the company's stock price.

CPH

4

Switzerland | Industrial Goods & Services

Exhibit 1: CPH - Comparison with division peers

Company

EV/EBITDA

P/S

P/E

3 year

3 year

3 year

average

CY2022E

CY2023E

average

CY2022E

CY2023E

average

CY2022E

CY2023E

CPH Chemie & Paper

6.1x

4.5x

6.1x

0.8x

0.6x

0.7x

10.5x

5.9x

10.1x

69.40

Paper peers:

Holmen

19.4x

11.5x

14.7x

3.4x

3.3x

3.4x

18.7x

17.3x

24.4x

Stora Enso

10.1x

5.7x

6.6x

1.2x

1.0x

1.0x

13.5x

8.7x

10.5x

Altri

9.9x

5.4x

7.6x

1.2x

1.1x

1.3x

13.3x

6.3x

9.8x

Metsa Board

9.8x

5.6x

6.7x

1.4x

1.3x

1.3x

14.5x

8.4x

10.6x

UPM-Kymmene

9.7x

10.0x

9.0x

1.7x

1.6x

1.5x

17.5x

15.2x

14.0x

Norkse Scogindustrier

4.4x

NA

NA

0.3x

NA

NA

24.5x

NA

NA

James Cropper

16.9x

0.1x

0.1x

1.2x

0.0x

0.0x

42.4x

17.0x

12.3x

OJI Holdings

7.4x

6.2x

NA

0.4x

0.3x

0.3x

10.8x

6.9x

6.4x

Chemistry peers:

Honeywell Int.

15.7x

14.5x

13.2x

3.8x

3.3x

3.1x

25.1x

20.1x

17.9x

Clariant

12.3x

NM

NM

1.5x

NA

27.1x

44.3x

NM

NM

Arkema

6.4x

3.9x

4.4x

0.9x

0.5x

0.5x

14.1x

6.1x

7.0x

Packaging peers:

MacFarlane Group

8.4x

0.1x

0.1x

0.7x

0.0x

0.0x

16.2x

9.3x

9.1x

Gerresheimer

11.9x

7.1x

6.2x

1.8x

0.9x

0.9x

22.7x

10.6x

8.8x

West Pharmaceutical Services

36.0x

20.2x

18.1x

9.2x

6.6x

6.2x

56.9x

29.4x

26.8x

Convertidora Industrial

3.5x

NA

NA

0.2x

NA

NA

5.9x

NA

NA

PSB Industries

4.1x

NA

NA

0.3x

NA

NA

13.2x

NA

NA

Bilcare Ltd

48.4x

NA

NA

0.1x

NA

NA

16.3x

NA

NA

Median

9.9x

5.9x

6.7x

1.2x

1.1x

1.3x

16.3x

9.9x

10.6x

High

48.4x

20.2x

18.1x

9.2x

6.6x

27.1x

56.9x

29.4x

26.8x

Low

3.5x

0.1x

0.1x

0.1x

0.0x

0.0x

5.9x

6.1x

6.4x

Premium (disc) to peers

(39%)

(24%)

(8%)

(28%)

(40%)

(47%)

(36%)

(40%)

(5%)

Source: Bloomberg and Refinitiv (as on 15 Sep 2022)

Exhibit 2: CPH - Comparison with weighted average of division peers

		EV/EBITDA			P/S			P/E
	3 year			3 year			3 year
	average	CY2022E CY2023E	average CY2022E	CY2023E	average	CY2022E	CY2023E
Weighted peer multiples	13.8x	7.5x	7.9x	1.7x	1.7x	3.6x	21.8x	12.9x	13.1x
CPH	6.1x	4.5x	6.1x	0.8x	0.6x	0.7x	10.5x	5.9x	10.1x
Premium (disc) to peers	(56%)	(40%)	(22%)	(51%)	(62%)	(80%)	(52%)	(54%)	(23%)

Source: Bloomberg and Refinitiv (as on 15 Sep 2022)