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

CPH to merge with Uetikon Industrieholding AG

Higher free float may aid rerating
CPH Chemie + Papier Holding AG (CPH) announced on Friday post market close that it plans to merge with Uetikon Industrieholding AG (Uetikon). Uetikon, which belongs to the group's founding family members, has been the main shareholder of CPH with a stake of around 50%. The transaction would entail the major shareholder to exchange its shares for a commensurate number in CPH shares. After the merger, Uetikon shareholders would become direct shareholders of CPH. The largest representatives of the founding family members, i.e Swiss Industrial Finance AG and the Ella Schnorf Estate, would hold just under one-third of CPH's shares. As a part of the transaction UVB Immobilien Treuhand Perlen AG, which manages CPH Group's non-operating real estate assets, would be also transferred to CPH. The merger transaction is expected to result in an increase in the free float of CPH shares to 62.6%. We believe the increased free float is expected to improve the shares' liquidity and should be viewed favorably by investors. Hence, in our view, the attractiveness of CPH's shares is likely to enhance going forward. CPH will seek shareholders' approval in an Extraordinary General Meeting to be held on 4 June 2021, whereas Uetikon will seek it in an ordinary general meeting on 2 June 2021.

Estimates unchanged
Ahead of CPH's FY 2020 due 23 February 2021, we are leaving our estimates unchanged.

Valuation and conclusion
We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 91.3 per share comes out higher than our previous target price (CHF 87.9), implying an upside of 35% from the previous closing price. We ascribe the higher value as the jump in free float may result in higher liquidity for CPH's shares, which implies a lower discount rate at which future cash flows would be discounted. 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 0.9x (FY2021E), a significant ~50% 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 as economic activity is likely to pick up only gradually. 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 include growth prospects in key markets, operating efficiency improvements from new production facilities, expansion of the Packaging and Chemistry divisions' share in revenue and earnings and improvement in the free float of the company's shares. The Paper division, which will be impacted in the short-term due to the weak economic environment in Europe, should benefit from 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 efficiency optimization initiatives across the group - 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.