Special Div From CSR?

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

By Chris Shaw

CSR ((CSR)) delivered an underlying interim profit of $89 million, the result down 8% in year-on-year terms and lower than market expectations. As an example, Macquarie had been forecasting an interim profit of $106 million.

The result was a messy one according to Macquarie, with the Sucrogen sugar assets disappointing, soft insulation and glass earnings but signs of stronger momentum in the core building products division. Earnings from aluminium were flat and property earnings improved off a low base.

Deutsche Bank also identified a margin improvement from the building products division as worthy of note, as it points to the gains stemming from a focus on costs and an improvement in operational efficiencies.

Not everyone in the market is convinced the building products division outlook is improving. While Macquarie pointed to some gains from better conditions in residential construction and ongoing benefits from cost reduction and efficiency improvements, UBS points out the division has not grown in line with the Australian economy for some time.

According to UBS this underperformance is the result of a combination of flat housing starts, a lack of product innovation and some structural overcapacity in the industry. The positive in the broker's view is CSR has a strong balance sheet, which presents management with opportunities to make this business more relevant to investors looking for growth investments.

While sugar division earnings fell short of estimates, Macquarie suggests this is not a great issue as there is a proposed sale of the division to Wilmar International in place. As well, Deutsche Bank notes the poor sugar result can be attributed to unseasonably wet weather, which makes it more of a timing issue than an operational disappointment.

The key for CSR, assuming the Sucrogen sale goes ahead, will be what management decides to do with the proceeds received from the sale. Deutsche notes group debt currently stands at $957.4 million, so assuming $1.75 billion in net proceeds CSR could effectively be debt free.

This is unlikely in Deutsche's view, as it anticipates management will prefer to retain a modest level of gearing while delivering some capital management initiatives to shareholders. Deutsche expects a fully franked dividend of 20c per share and a 10% share buyback at $1.80 per share.

Macquarie is unsure of what form any capital return is likely to take but expects a total return equal to $850 million or 56c per share, while UBS estimates a total return of 55c per share, down from 72c previously.

Post the interim result there have been some minor changes to earnings estimates across the market. Citi also lowered its earnings forecasts post the result and at the same time the broker has downgraded to a Sell rating from Hold previously. The downgrade reflects recent share price strength and a cut in price target to $1.65 from $1.80.

This was the only change in rating post the interim result, the FNArena database showing CSR is rated as Buy twice, Hold three times and Sell once. The consensus price target on CSR according to the FNArena database stands at $1.96, down from 1.99 previously.

Shares in CSR today are down slightly and as at 1.30pm the stock was 3c lower at $1.78. This compares to a range over the past year of $1.585 to $2.13 and implies upside of around 10% to the consensus price target in the FNArena database.

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