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


CPH strengthens its chemicals' position
 

Armar AG will be integrated in CPH's Chemistry Division

CPH's Chemistry division, Zeochem AG, will acquire its long-term and established distribution partner Armar AG. The acquisition, which is effective from 1 March 2018, will help the smallest of CPH's divisions to expand its business in deuterated solvents. These are used as synthetic building blocks in pharmaceutical agents, in NMR spectroscopy and for the production of organic light-emitting diodes or OLEDs. The transaction was facilitated by a succession situation since the shareholder and CEO of the company, Adrian Geiger, was looking to transfer his stake. He will also move to Zeochem with the transfer of the business. According to the agreement, Zeochem AG would integrate Amar's current production at its operational unit in Rüti (Canton Zurich).

We assume that, geographically, most customers of Armar are situated in Europe and - given the existing distribution relationship - there should be no major overlap with Zeochem's customers. Thus, the transaction should be fully complementary on the customer and product portfolios and marks a further move by CPH to diversify its revenue base away from its largest, the Paper, division into more growth-oriented industries such as Chemicals and/or Packaging.

In terms of financials, CPH indicated that the annual revenue of Armar would be in the mid-single digit million range (for modelling purposes we assume ~CHF 5 million), with an estimated 2018E contribution of CHF4 million-CHF4.5 million to CPH's top-line. We believe that the EBIT margin of Armar should be broadly in line with CPH's Chemistry division's margin of 5%. Thus, we estimate an accretion of CHF 0.2 million to the 2018E EBIT. We have adjusted our 2018E estimates accordingly and increased our sales and EBIT estimates on a Group level by 0.9% and 2.1%, respectively. Since no further information was disclosed regarding the terms of the transaction, we leave our current balance sheet and cash flow estimates unchanged.

Overall, we are encouraged by the management's move to supplement the Chemistry division's deuterated products portfolio by acquiring and integrating its longstanding distribution partner.

Valuation and conclusion

We value CPH using DCF and relative valuation techniques. In the DCF analysis, we have retained our WACC at 6.1%. Considering the better growth prospects post the acquisition, we increased our target price to CHF60.9 per share from CHF57.2 per share earlier, which gives an upside of 7.8% from the current levels.

On a relative basis, the stock is trading at a steep discount of ~39% to the weighted average of its peers on a 2018E P/S basis. Similarly, the company trades at discount of ~7% on a 2018E EV/EBITDA basis.

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 non-paper related Chemcials' and Packaging division as well as the Asia-Pacific region. In addition, higher operating efficiencies from new production facilities coupled with acquisition synergies should help to improve the profitability profile in the medium term.