CSR Weathers FY13, Just

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-CSR pulls through FY13 with low debt
-But Viridian keeps underperforming
-Needs improvement in housing
-Aluminium hedging viewed positively
 

By Eva Brocklehurst

Diversified industrial company CSR ((CSR)) has weathered FY13, but how well? Profit, while in line with guidance, was down 63% on FY12. The final dividend of 2.1c puts the full-year pay-out at 40%, at the low end of the guided range. In the main, brokers expect CSR to come through the current weak building environment reasonably well, helped by low gearing. The downside is that earnings growth remains hostage to a slower-than-usual recovery in housing markets.

Just when the losses were expected to stop mounting for the Viridian glass business the division disappointed brokers again. Another $196m was added to impairments for the business in FY13, well above broker expectations. An economic return is now as far away as FY16, in CIMB's view. Viridian's deterioration is being driven by weakness in demand, and the inability to achieve price increases amid market share loss to imports. Citi notes that the excess industry capacity and high Australian dollar continue to provide headwinds in this regard. BA-Merrill Lynch believes restructuring initiatives will not be enough to get the glass business back to break even and additional support is required from a pick up in building volumes, a more competitive Australian dollar and industry pricing – when that comes.

Outside of glass, CSR was commended for its performance in the current circumstances by both BA-Merrill Lynch and CIMB. This is highlighted in the wake of competitor Boral's ((BLD)) downgrade. CIMB finds the difference in performance between the two companies quite stark and believes CSR will best benefit from the turnaround in the fortunes of the building industry. Citi liked the fact that CSR's plasterboard revenue held up comparatively better than the rest of the market and there was strong momentum in lightweight concrete products.

What has offset the weak glass business, somewhat, is favourable forward hedging in aluminium. CSR's realised price has outperformed spot prices as it has hedged forward volumes on periods of price strength. Notwithstanding this fact, this variable is one Merrills has the least confidence in forecasting. The price of aluminium is a key to the fortunes of the Tomago smelter and CSR's sensitivity is heightened at present. Every $100 improvement in the Australian dollar denominated price adds $7m to net profit and 12% to the broker's FY14 estimates. This hedging was always going to be key to CIMB's view on the stock as well. The broker finds that, with just 32% hedging locked in for FY14, the company is vulnerable to the volatility in the aluminium price and the Australian dollar. Macquarie's commodities research shows aluminium prices cutting into the cost-supply curve, even after allowance for near-record physical premiums. This should lend some support to aluminum prices although the surplus in the market also limits scope for a rally from a fundamental perspective.

Bricks and roofing formed the solid core of CSR's earnings in FY13. Management attributed this to an improved operating environment in Queensland and NSW and industry rationalisation. CSR estimated total housing starts for FY14 would be up 2% on prior comparative levels. This is consistent with the brokers' view that there will be a gradual improvement in the industry. The value of non-residential construction work is expected to remain flat.. BA-Merrill Lynch does not expect Australian housing volumes will recover to the extent of recent cycles, despite a continued reduction in interest rates. Citi finds it interesting that CSR is now investing in product development and distribution to improve sales. Three new Gyprock trade centres have been opened, new Bradford energy solutions have been launched and glasswool has been re-engineered for commercial purposes as a substitute for the discontinued rockwool.

Macquarie gave the tick of approval to bricks and roofing and likes the fact the company has low net debt and balance sheet capacity to the tune of $300m, which can fund growth opportunities when these can be found. The company will also receive cash from the sale of land at Brendale over coming months. Asbestos payments were also the lowest since FY08 and CSR expects FY14 will also be lower year-on-year. Brokers noted the lack of property earnings in FY13. Macquarie thinks this will change in FY14 with a strong pipeline of projects. Cloverlea in Melbourne is expected to deliver revenue of $155m over a five-year development, commencing in FY14. CSR is also marketing a nine hectare industrial site in Sydney's Erskine Park.

Brokers maintain a subdued outlook and this is reflected in the FNArena database, which has no Buy ratings. There are five Hold and three Sell. The consensus target price is $1.94, signalling 2.6% downside to the last share price. The dividend yield is 3.9% for FY14 and 5.2% for FY15.
 

See also, CSR Takes More Viridian Medicine on March 12 2013 

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