Research Dynamics - Report on CPHN: Event Update

Separation of Paper business from Chemistry and Packaging activities

On 20 June 2024, the spin-off was approved in an Extraordinary General Meeting with a high shareholder approval rate of 98.2%. The distribution of Perlen Industrieholding AG (PIHAG) shares to CPH Group AG shareholders will occur on 27 June 2024 on a 1:1 basis, meaning each shareholder will receive one share of CPH Group AG and one share of Perlen Industrieholding AG for each share held in CPH. The shares of the new Perlen Industrieholding AG have begun trading on 25 June 2024 at a price of CHF 24.50 per share, equivalent to a valuation of CHF 150 million for PIHAG. At the same time, CPH Group AG’s opening price on 25 June amounted to CHF 71.00 per share, equivalent of a valuation of CHF 426 million.

Earlier in the year, CPH Chemie + Papier Holding AG’s (CPH) Board of Directors had announced its intention to separate the more volatile Perlen Paper business from the Chemistry and Packaging activities business through a spin-off. It was intended that, following the separation, CPH (excluding the Paper business) shall be renamed CPH Group AG and retain the Chemistry and Packaging divisions. The spin-off entity shall focus on the Paper business and real estate in Perlen, Switzerland, under the name Perlen Industrieholding AG.

The spin-off transaction separates the Paper business from the Chemistry and Packaging activities. This separation was achieved by distributing shares of Perlen Industrieholding AG (the spin-off entity) to all existing CPH shareholders as a dividend. According to the company's internal valuation, approximately 72% of CPH’s value would be attributed to CPH Group AG, with the remaining 28% assigned to Perlen Industrieholding AG. Post separation, CPH Group AG continues to trade on SIX Swiss Exchange, while Perlen Industrieholding AG shares are available on OTC-X of the Berner Kantonalbank and LPZ-X of the Bank Lienhardt & Partner.

The transaction aligns with the Board of Directors’ efforts towards refocusing the business by creating two independent companies aligned with their different strategic orientations of differentiation (Chemistry and Packaging) vs. cost leadership (Paper business). It will not impact the day-to-day operations of the Chemistry, Packaging, and Paper divisions. Market presence and brand identities will remain consistent, such as Zeochem for Chemistry, Perlen Packaging for Packaging, and Perlen Papier AG for Paper. The restructuring of the holding will not bring about any alterations for the independently operating companies' employees, customers, or business partners.

CPH Group AG after the transaction

Post-separation, the CPH Group AG houses the Chemistry and Packaging divisions, which have demonstrated remarkable growth over the past five years. The Chemistry and Packaging divisions boast sales compound annual growth rates (CAGRs) of 12.2% and 11.6% from 2019 to 2023, respectively. Their strategic positioning within global niche markets has undoubtedly contributed to this success. Furthermore, a similarly positive trend is observed in the EBIT margin development across the Packaging and Chemical segments. In Packaging, the EBIT margin has more than doubled from 5.6% in FY19 to 12.7% in FY23, and in Chemical, it increased from 11.3% in FY19 to 15.2% in FY23.

However, in the short term, the spin-off is expected to adversely affect CPH Group AG's financial statements. The fair values of the spun-off division's net assets and the goodwill from the APS Altpapier Service Schweiz AG acquisition will be written off against the dividend-in-kind distributed to shareholders. The resultant non-cash expense of approximately CHF 20.0mn arising due to the recycling of goodwill is expected to negatively affect the operating result (EBITDA) for the first half of 2024 as an accounting expense. Consequently, both the EBIT and the net result of CPH Group AG are anticipated to be negative for this period. For the full year, the operating result of the CPH Group AG is expected to be in the low-double-digit million range after the transaction.

Valuation and conclusion

Separation of the Paper division is expected to support the value unlocking of CPH Group as the Packaging and Chemistry division offers a favourable long-term outlook. The operating results of the Packaging and Chemistry divisions are expected to remain resilient. Apart from a supportive outlook, the cost optimisation efforts are expected to result in margin improvement to the 16-18% range going forward, which should lead to solid earnings growth.

We value CPH using DCF and relative valuation techniques. Our intrinsic value of CHF 86.1 per share implies an upside of 30.8% from current levels. For relative valuation, since the Group operates in two entirely different divisions, we compare CPH’s divisions with various 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 an EV/EBITDA multiple of 4.9x (FY2024e), a significant 44.0% discount to the weighted average multiple of division peers.