Not Everybody Sees Value In De-Merging CSR

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By Chris Shaw

Several months ago CSR ((CSR)) announced plans to de-merge the business into a building products company also containing its aluminium operations and a sugar business. This process continues with the company yesterday announcing an equity issue to raise $375 million, management noting the money will ensure the sugar company is adequately capitalised once it lists.

At the same time the company announced interim earnings that were ahead of market forecasts, though as Deutsche bank notes the result of $96.6 million was helped by the bringing forward of some earnings in its sugar business thanks to the timing of the crushing of crops.

Elsewhere in the result Citi notes margins in the building division improved on the back of cost cuts, helped by both lower labour and freight costs and cost outs in the bricks and roofing operations. Results for aluminium were solid in the broker’s view, while the big drag was the Viridis glass business, which along with reporting a loss of $5.6 million saw a write-down of $250 million.

Deutsche bank notes this means almost half the invested capital in the business has been written down as it follows on the heels of a $280 million write-down at the full year result six months ago. As Deutsche Bank notes, the write-downs confirm the company paid too much when it bought the business in 2007, while it suggests the achieving of targeted earnings from the business may be something of a stretch going forward.

Factoring in the equity issue and the interim profit result has seen brokers adjust earnings forecasts, JP Morgan cutting its earnings per share (EPS) forecasts by 10-11% through to FY12 reflecting result related cuts of 4-5% and 5-7% adjustments for the equity issue. Post the changes the broker’s normalised EPS estimates stand at 10.2c in FY10 and 14.5c in FY11, while Deutsche Bank, which was at the top end of the consensus range leading into the interim result, is at 12c and 15c respectively.

Credit Suisse is forecasting EPS of 10.1c and 15.3c respectively, while the 0.4% and 7.4% reductions made by Bank of America Merrill Lynch mean its forecasts now stand at 11.1c and 15.5c respectively in FY10 and Fy11. Consensus forecasts according to the FNArena database are 11c and 14.7c for FY10 and FY11.

Brokers overall remain mixed on the outlook for the shares, as evidenced by ratings in the FNArena database showing a total of three Buys, five Hold and two Sells. Deutsche Bank sees the stock as fair value at current levels while JP Morgan, which has an Overweight rating, suggests the de-merger process could see additional value unlocked, particularly if sugar prices remain at current high levels. As well, the broker has the company’s building products business as its preferred exxposure in that sector. Maquarie agrees, seeing the raising as improving the group’s balance sheet, so leaving it better placed for the de-merger process.

But Bank of America Merrill Lynch retains its Underperform recommendation and takes the view the de-merger of the sugar business is unlikely to create any value, especially given the costs of the process are expected to add up to around $60 million. The equity raising comes at a strange time in the view of Credit Suisse, though the broker does see it as removing some uncertainty surrounding the overall de-merger process and also opens up scope for international interest in the sugar business given it will be appropriately capitalised. 

While there have been some changes to earnings forecasts there has been little movement in price targets, the database showing the average target for the stock is now $1.94, up from $1.92 prior to the latest announcements. Shares in CSR today are suspended as the company prepares for the issue but last traded at $1.985, which compares to a range over the past year of $0.905 to $2.31.

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