Australia | Feb 05 2009
By Chris Shaw
As part of the Federal Government’s latest stimulus package to try and kick start the Australian economy, it will pay for 2.2 million homes to be insulated and will offer rebates on the process for another 500,000 homes. On face value this offers upside for CSR ((CSR)) given it is one of the leaders in the Australian insulation market, but not everything is always what it looks like.
On Bank of America-Merrill Lynch numbers, the company currently has around 50% of market share in the Australian insulation market and this market is currently operating at around 60% of capacity. If the stimulus package lifts this to 100% capacity the broker estimates it could add around $100 million or 2.5% to group revenues, or about 3% to EBITDA (earnings before interest, tax, depreciation and amortisation).
The problem in the broker’s view, and it is a view shared by analysts at Citi, is that the bringing forward of work for the insulation industry could leave the industry with overcapacity and under-utilisation in a few years from now. As Citi puts it, while gaining a 1-3% increase in earnings for the next couple of years, the company permanently loses a key end market.
As an example of this, Bank of America-Merrill Lynch estimates on housing starts of 165,000 and flat commercial building levels compared to FY08, the completion of the government program in two and a half years time implies future capacity utilisation in the insulation sector of just 55%, which is lower than current levels.
There is one possible bright spot for the company in the broker’s view, as it notes the program is recognition of the need for “greener” building codes going forward and this bodes well for the company’s range of energy efficiency products. But as Bank of America-Merrill Lynch points out, a recovery in the new Australian housing market is still required for this to have a significant impact on earnings and this is unlikely given the current economic climate.
Other key drivers for the stock, in the broker’s view, are global aluminium and sugar prices. Given these are also exposed to the current economic downturn, the stockbroker remains comfortable with its Underperform rating on the stock, a view matched by Citi.
Overall the FNArena database shows the stock is rated as Buy three times, Accumulate once, Hold four times and Sell twice. UBS earlier this week upgraded to a Buy on valuation grounds. The ratings reflect consensus earnings per share estimates of 14.2c this year and 17.8c in FY10, with Citi at 13c and 11.9c respectively and Bank of America-Merrill Lynch forecasting 14.9c and 17.4c.
The average price target on the stock is $1.92, which is unchanged post news of the insulation plan. Shares in CSR today are slightly weaker in early trading and as at 11.00am the stock was down 3c at $1.42. This compares to a trading range over the past 12 months of $1.27 to $3.44.