Sale of Uetikon site to Canton of Zurich
Successful conclusion of lengthy negotiations
CPH Group had been in discussions about the future of its Uetikon site for some time, not least due to the challenging situation of the Switzerland-based manufacturing location for its Chemistry products. While talks with the community of Uetikon for a mixed usage of the site failed due to exaggerated demands from various interest groups within the community as well as questions of competence over the lake bed adjacent to the site close to a decade ago, CPH now was able to negotiate a good solution for all parties involved. As the need for a new high school (“Kantonsschule”) on the right side of Lake Zurich has mounted due to the expected increasing number of students (+25% until 2027), the Canton of Zurich has evaluated a number of possible sites. Uetikon now comes out as the winning contender not least thanks to the well-developed location approximately in the middle of the right Lake Zurich shore. As a result, the Canton of Zurich is now purchasing 65,000 square metres of industrial land from the CPH group for a total sales price of CHF 52 mn of which the Canton will hold back CHF 32 mn for environmental clean-up of the site and the adjacent lake bed.
Implications for CPH’s Chemistry division
For a two-year period, CPH can continue with its current activities (R&D, production and administration) on the site thanks to a lease-back contract with the Canton. In the meantime, the Chemistry division is considering relocation options for the manufacturing of molecular sieves, chromatography gels and deuterated solvents. The fertilizer production will be ceased in the medium-term, affecting 11 positions. Financially, deducting the environmental clean-up costs from the sales price, the resulting difference of CHF 20 mn fully covers write downs and all other costs. As these costs have not yet been quantified by the company, we leave our estimates unchanged for the moment. While revenues should be less affected by the move, there still should be a positive impact on the results line in 2016. As such, we would expect that the Group can generate a net profit in 2016 in the single-digit range (vs. our current estimate of a net loss of CHF 4 mn).
Strategically sensible move
While the sale of land that was at the origins of the company’s foundation in 1818 may have been an emotionally engaging process for the family, who stills own 49.9% of CPH through UBV Uetikon Betriebs- und Verwaltungs AG, we believe it is the most sensible solution given the current market environment. The step opens up options to relocate manufacturing to more competitive locations, also bringing products closer to customers. As such, the Chemistry division recently concluded the acquisition of China-based ALSIO, creating new production capacities for molecular sieves. While during the transition phase some of the orders may be processed by the US facility in Louisville, KY, we expect that after the closure of the Uetikon site foreseen in two years period the Chemistry division will be serving the European and Asian markets mostly out of China. Ultimately, we expect this to be positive for margins in the medium to long term.
Valuation
Since the group operates in three different divisions with no synergies between them, we have prepared a different set of industry peers for each of CPH’s divisions. We have employed three parameters – EV/EBITDA, P/S and P/E – to analyse the relative valuation of the group. Initially, we have calculated the peer average of CPH’s individual divisions, and then taken a weighted average of these based on the sales contribution of the respective division. Given its diversified business model, this consolidated peer average is most comparable to CPH’s valuation multiples. CPH currently trades at a P/S multiple of 0.5x (FY2016E), a significant 38% discount over the weighted average of division peers. On a 3-year historical P/S basis, CPH is trading at a premium of 6%. However, on a 2016E EV/EBITDA basis, CPH is trading at a premium of 21% to its product peers.
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