CSR Primed For Gains As Housing Accelerates

This story features CSR LIMITED. For more info SHARE ANALYSIS: CSR

-Price rises for key products
-Key play for housing recovery
-Viridian losses reducing
-Aluminium price underpinned
 

By Eva Brocklehurst

The various strands of CSR's ((CSR)) building products business are coming together, given the step-up in the house and building recovery. Brokers suspect that, despite recent share price gains, there's more to come, as the construction environment shapes up favourably with a surge in detached housing amid low interest rates. The stock has languished relative to others in the sector because its aluminium and glass businesses have offset other building product earnings, notes UBS. This year CSR's building products business has benefited from restructuring and, as JP Morgan notes, plasterboard operations, in particular, have been robust. Moreover, some recent developments in the aluminium market augur positively for the company's smelter interests.

Moelis suspects the company's potential operational leverage is being underestimated, given its relatively early stage exposure to the housing recovery and a suite of market-leading building products. CSR has recently acquired AFS Products, a company which offers load-bearing permanent wall frames, a platform for CSR to enter this segment. The purchase price of $40m will be funded by debt and Moelis expects, having paid a FY14 earnings multiple of six times, that the acquisition will be accretive in the first year. CSR's primary housing exposure is via building products which contribute 85% of earnings. The broker also observes turning Viridian's glass business around remains a number one priority. The division lost $10.6min the first half but break even is targeted within the next two years.

Moelis likes the stock, despite the 75% appreciation in the share price over the past year and retains a target of $4.50 and a Buy rating. The broker concedes there are some risk variables such as the currency, the aluminium price and the need to reduce Viridian losses but these are all seen trending in the right direction.

UBS concedes that Viridian is not materially benefiting from an increase in high rise residential development, because of cheap imports. Nevertheless, the business is predominantly in detached housing so the stock is a key play on the recovery. In the sector residential building has been the strongest performer, with increased activity expected to flow into CSR's FY15 results. The company has a March year end. UBS expects this improvement will be sustained over the medium term. 

Deutsche Bank considers the price increases that occurred in March in plasterboard, bricks, insulation and glass should stick during the current recovery and has upgraded CSR to Buy from Hold on this basis. The broker believes consensus expectations for FY15 and FY16 are too low, envisaging as much as 15% upside potential in the share price. Moreover, if the aluminium ingot premium stays high in FY15 – around US$350/t – this could lead to further earnings upside of around 14% for FY15. Currently the Japanese ingot premiums are around US$257/t, Macquarie reports.

The likelihood of aluminium inventories being delivered from London Metal Exchange warehouses into a tight physical market, ex China, is much lower now and a prolonged period of elevated premiums looks probable to Macquarie. The broker cites the recent UK High Court ruling as providing near-term support for CSR's interest in the Tomago smelter and the first half. The ruling has vetoed the LME's proposed changes to warehousing rules. This defeat has positive implications for aluminium producers, as the potential for metal to flow from inventory has been reduced. Macquarie will be watching for the next move by regulators to tackle what the broker describes as a dysfunctional market, but believes the LME is likely to appeal the decision. In the short term, an elevated inventory is expected to overhang the aluminium market.

CSR's consensus target price on the FNArena database has risen to $3.15 currently, from $2.94 at the start of April, and suggests 12.7% downside to the last share price. The targets range from $2.60 (JP Morgan) to $3.68 (Deutsche Bank). There are two Buy ratings, two Hold and one Sell. 
 

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