CSR: Looking Better But Risks Remain

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

 – CSR interim result viewed as reasonable
 – Aluminium better than expected, Viridian a disappointment
 – Brokers adjust forecasts and price targets
 – Downside risk to earnings mean Neutral ratings dominate
 

By Chris Shaw

Yesterday building materials producer CSR ((CSR)) reported interim underlying net profit of $20.4 million, the result down almost 60% on the previous corresponding period but one that was viewed as reasonably solid by brokers.

Result composition was different to expectations. The aluminium division delivered a stronger result than expected thanks to higher sales and better realised pricing, while the Viridian glass operations again fell short thanks to continuing tough operating conditions. The latter's performance and a recent change in management for the business has prompted a review of operations and cost structure.

With around 80% of second half aluminium sales locked in at a price around 20% above the current spot price, earnings forecasts for CSR have been adjusted post the interim result. BA Merrill Lynch has lifted full year forecasts by more than 30%, while Macquarie's estimates for the full year have risen by around 20%.

Consensus earnings per share (EPS) estimates for CSR according to the FNArena database now stand at 9.1c for FY13 and 14.3c for FY14. The increase in earnings forecast for FY14 reflects in large part an expected improvement in Australian residential building activity.

This implies some earnings risk, as while BA Merrill Lynch is forecasting a 14% increase in Australian housing starts in FY14 the broker has a low level of confidence in this increase being achieved. As well, BA-ML's EPS forecast for FY14 for CSR of 16.4c implies an improvement in the Viridian business and again the broker is not confident this can be achieved given the adverse combination of a high Australian dollar and weak demand.

Deutsche Banks is similarly cautious, noting while its forecast is for Australian housing starts in FY14 of 144,000, if the recovery is slower than expected and starts rose to just 139,600 there would be a 9% reduction in CSR's earnings before interest and tax.

In the view of Citi, the CSR result showed management continues to do a good job in managing the operating environment, but the fact both structural and cyclical factors continue to run against the company limit the potential for any share price outperformance.

For Citi this is enough to maintain a Sell rating on CSR, especially given on balance the broker continues to see downside risk to earnings forecasts. BA-ML agrees with the rating, suggesting better exposure to the Australian building materials sector can be had via Fletcher Building ((FBU)). For US exposure the broker prefers James Hardie ((JHX)).

Others in the market are less negative, as post reviews of the interim result the likes of Deutsche Bank, UBS, JP Morgan and Macquarie all rate CSR as a Hold. Macquarie sees some valuation upside but suggests performance at Viridian needs improve if this upside is to be realised, while JP Morgan suggests the stock is fair value around current levels.

While no broker ratings were adjusted post CSR's interim result, the changes to earnings forecasts mean price targets have been revised. Macquarie's target has increased to $1.75 from $1.44 and JP Morgan's to $1.70 from $1.60, while the consensus price target according to the FNArena database has risen to $1.70 from $1.63.

In a weaker overall market shares in CSR today are higher and as at 11.30am the stock was up 4c at $1.705. This compares to a trading range over the past year of $1.145 to $2.32. 

 

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