Australia | May 17 2007
By Greg Peel
“There is little sense right now that CSR is best in class at anything much”.
This comment from UBS possibly sums up the feeling around brokerages at the moment about the diverse company that was once the Colonial Sugar Refineries. While Wesfarmers (WES) might win the award for the biggest conglomerate of mutually exclusive businesses, CSR’s (CSR) mix of sugar, aluminium and building products comes close, and has not managed to inspire in any sector. And FY08 looks worse.
The FY07 result was not much different to what was expected, but analysts were not heartened by the outlook for FY08. This led to across the board earnings downgrades of varying degrees. The unhedged sugar business will probably suffer from lower prices, the hedged aluminium business probably won’t benefit from higher prices, and a turnaround in NSW housing seems but a distant dream.
Since divesting of its heavy building materials business – Rinker (RIN) – in 2003, CSR was left with a strategy of cash generation rather than growth. While the company has managed to avoid risky growth options, it is now paying the price for underinvestment and for not managing its cash businesses very well. CSR is planning to upgrade some of its existing facilities, but as GSJB Were puts it, this is just playing catch-up. What analysts really wanted was some sort of guidance on overall company strategy.
What they got was a vague commitment to review opportunities in Brazil (sugar), Asia (building products) and Australia (renewable energy). This seems to imply there is no plan yet to change the CSR portfolio or move to any form of break-up. New CEO Jerry Maycock alluded to something down the track, but that was all. Analysts weren’t necessarily expecting Maycock to be announcing grand new strategy initiatives in the short time he’s been at the helm, but they were hoping he would.
Now it’s a waiting game.
It’s no surprise that CSR shows a 0/7/2 B/H/S rating in the FNArena database. This is a balance between a dreary outlook and the possibility of something changing some time soon. Clearly CSR has growth on the agenda, otherwise it would have addressed capital management, or increased the dividend, or both, but did neither. The average target price in the database is $3.39. With the stock currently trading over $3.50, it is hardly way overvalued but offers little as an upside story in the near term.