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

Growth momentum continues
After an impressive 1H2018 (top line +14.0% y/y to CHF 264.1 mn; net profit at CHF 22.6 mn against a net loss of CHF 2.2 mn in 1H2017), CPH continues to enjoy positive momentum in the second half of the year. According to the company, 3Q2018 operating profit improved further with revenue growing at a similar pace as during 1H2018. Sales benefited from steady paper prices, but currency headwinds negatively impacted the top line.
 

FY2018 guidance is in line with our estimates
Assuming a stable macroeconomic environment and benign currencies in 4Q2018, the group expects to deliver net sales growth for the full year 2018, with the growth rate being only slightly below that achieved in 1H2018. The EBIT margin guidance is for the range of 9-11% and net profit is guided to more than double for full year 2018 compared to 2017 levels (excluding any extraordinary items). Management continues to expect the newly acquired businesses of Armar and Yusheng in the Chemistry division, APS (former Papierfabrik Utzenstorf) in the Paper and Sekoya in the Packaging division to have a positive impact on overall group sales volumes. The guidance provided by the company is in line with our previous estimates for FY2018. Consequently, our P&L forecasts for FY 2018 and beyond remain unchanged.
 

Public bond issue increased to CHF 100mn from CHF 85mn
On 14 September, CPH announced that it has issued at-par corporate bonds worth CHF 85 mn with a maturity of 5 years and an annual coupon rate of 2.0%. On 8 October, the company increased the total amount of the bond issuance to CHF 100 mn in response to high investor demand.

The proceeds from this additional issue will be used to refinance the group's 2014 bonds of CHF 120 mn with a coupon of 2.75% due to be redeemed on 10 July 2019. Through this bond issuance, CPH has ensured a timely refinancing of the previously issued bonds at a lower coupon rate. The company is also paring its debt burden by repaying a portion of the original bonds using its own funds.

Lower-cost refinancing of debt coupled with a repayment of CHF 20 mn is collectively expected to result in a savings of ~CHF 1.0 mn in net annual interest cost, assuming an effective tax rate of 20%. The company should realise the full benefits of these savings from FY2020 onwards, given that the debt matures only in July 2019.
 

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our assumptions in the DCF valuation remain unchanged (market risk premium of 8.2%, beta of 0.9 and risk-free rate of 0.5%). Our intrinsic value of CHF 101.2 per share remains unchanged as well, implying an upside of 19.1% from current levels.

CPH currently trades at a P/S multiple of 1.0x (FY2018E), a significant 42% discount over the weighted average of division peers.

In the medium-term, we expect this discount to narrow and the stock to witness a revaluation, considering strong growth prospects in key markets, improved operating efficiencies from the new production facilities and expansion of its Packaging and Chemistry divisions.The Paper division should benefit from its local market leadership, advanced technology and continued operational improvements, although the business environment with overcapacities and decreasing demand for newsprint paper remains challenging.