Australia | Jul 11 2008
By Greg Peel
It is a measure of the nervous state of the market a present that what amounted to a profit warning from CSR ((CSR)) should be met by a sharp 14% share price sell-off yesterday. In many an analysts’ view, the market overly panicked.
CSR is one of the few remaining mismatched conglomerates among Australia’s large cap-stocks, being a producer of sugar, aluminium and building products. Every other month there are calls for the company to split itself up, and this has been going on for years. While one might argue that CSR offers diversification, it seems every time one element of the business is doing well, another isn’t.
There are no surprises that the local building materials market has been tough going of late, and there is little light at the end of the tunnel presently. The aluminium price has been surging, but given aluminium smelting is one of the most energy intensive of all industries costs have also soared, undermining profits. And while every other food commodity has skyrocketed in recent times, the sugar price has fluctuated.
The end result is that CSR yesterday provided upgraded guidance to suggest that all divisions, with the exception of Glass, will see flat to only slightly positive earnings growth in FY09. Glass is facing tougher times. The upshot is that group earnings growth should be around 5%, whereas previous guidance had that figure at 15-20%. While not all analysts had been quite as positive as CSR management previously, what amounted to a profit downgrade still came as a bit of a shock.
Thus a series of significant earnings per share downgrades have ensued, sending the average target in the FNArena database down from $3.11 to $2.72.
However, the market yesterday dumped the stock to the tune of 14%, and nearly all analysts agree that is a severe overreaction. Prior to the update the B/H/S ratio in the FNArena database was 2/6/2 but this morning that ratio has jumped to 5/4/1 following four broker upgrades – one from Sell to Hold and the others from Hold to Buy. Only Merrill Lynch remains as a Sell.
Merrills’ analysts acknowledge the shift down in share price to what appears to be good value, but because of there being little prospect of anything other than tough times ahead, they continue to believe CSR will underperform. For other brokers it is simply a case of finding value too compelling at this level.
At yesterday’s closing price CSR was trading on an FY09 price to earnings ratio of close to 10x which is historically very low. Its dividend yield based on FY09 earnings forecasts is 7.6% fully franked. This in itself is enough for some analysts to play the historical valuation game, but there is also a level of consensus that each of CSR’s major divisions are looking at potential earnings upside.
In short, analysts suggest the sugar price is set to run, the aluminium price has only just begun to run, and building products – well for building products they just can’t see things getting any worse from here. UBS, for example, who has held its earlier Buy rating, believes virtually every revenue stream is facing potential upside. The confidence of the UBS analysts comes despite them being peeved that management did not choose to offer any specific EPS guidance, but then if you had a Buy on a stock that falls 14% you’d probably be peeved as well.
The market has responded to analysts’ value calls this morning, buying the stock back up by 7%. While it’s all well and good, investors need to nevertheless be wary of some of these “value” calls at present based on low multiples and high yields. In industries as skittish as CSR’s – and building products look like being poison for a long time to come yet – comparisons against five-year average PEs, for example, may not be all that relevant. Unless the analysts are right about a bounce in all divisions, how safe is the dividend? And P has fallen a long way to provide a low PE, but one might just want to keep an eye on E.