Currency hits 2015 results, recovery seen in 2016
2015: Volumes increase, but strong currency depresses earnings
CPH Group’s revenues came under pressure primarily from external factors, falling 14.7% y/y to CHF 420mn in 2015. The Swiss National Bank’s decision to remove the CHF/Euro exchange rate peg at the start of 2015, resulting in the Euro falling from over CHF 1.20 to 1.09 by December 2015, had an adverse impact on all divisions of CPH. The depreciation of the Euro resulted in lower sales to the tune of CHF 50.4mn during the year. In addition, lower product prices, especially for paper, put further pressure on revenues. On a positive note, the company was able to improve sales volumes across all divisions, even in the current sluggish global economic scenario. At the operating level, the company posted a loss of CHF 21.8mn for 2015, compared to a profit of CHF 6mn in 2014. As a result, the company reported a net loss of CHF 33.1mn in 2015 compared to a net profit of CHF 10.5mn in 2014. The Paper division, which accounts for around 60% of CPH’s revenues, was the hardest hit since it exports almost 77% of its production to the Eurozone. Revenues from the paper segment fell 21.2% y/y to CHF 247.8mn, resulting in an operating loss of CHF 28mn. The packaging segment reported a 6.8% y/y decline in revenues to CHF 109.7mn, while the operating profit stood at CHF 5.9mn, up 15.9% y/y. Revenues from the Chemistry segment improved 3.8% y/y to CHF 62.5mn, with an EBIT of CHF -1.8 mn.
Strategically important 2016: Entry into China market
2016 will be a strategically important year for CPH, as the company begins manufacturing operations in the rapidly growing Chinese market and completes the acquisition of China-based ALSIO. This marks the company’s entry into low a production cost region and will significantly increase its presence in the fast growing Asian market. These developments are expected to lower the company’s overall production costs and result in improved margins. It would also lower the impact of currency fluctuations as it reduces the exposure to the CHF.
Performance likely to improve
CPH’s largest division, Paper, is expected to post an improved performance in 2016 as paper prices are rising moderately after the sharp fall witnessed over the last few years and sales volumes remain stable. Efficiency improvements from the new PM7 machine and an increased proportion of higher margin products are expected to improve the division’s profitability. The packaging division should benefit from the start of manufacturing operations at the new China plant. Increased focus on higher value products and the fast growing Asian region would support the division’s profitability. The chemistry division should get a boost from the acquisition of China-based ALSIO, a manufacturer of molecular sieves. The acquisition, expected to be completed by mid-2016, would help CPH increase its footprint in the Asian market. The lifting of sanctions on Iran opens a new potential market for the company, in face of the slowdown in the US shale gas industry. These developments should help the company achieve its target of reducing the contribution from the paper division, as well as reduce costs incurred in Swiss franc. The recovery in paper prices, along with stable sales volumes across all divisions and the China acquisition is expected to result in revenue growth of ~5% y/y in 2016.
Valuation
At current price levels, CPH shares trade at a discount of 44% to its peers on P/S basis. Similarly, CPH is trading at a discount of 32% to its 3-year historical average P/S. With the currency stabilizing in Switzerland and given the company’s expansion measures in low cost production centres coupled with the demand dynamics shifting from developed economies to emerging economies, we expect the company to improve its earnings in the near to medium-term. Also, with paper prices inching up towards the end of the year in Europe, CPH should be able to reverse its losses sooner. Also, the positives from the Packaging and Chemistry divisions would help CPH in the long-run by reducing the dependency on its Paper division.
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