Treasure Chest: CSR Is Not Overvalued

This story features CSR LIMITED, and other companies. For more info SHARE ANALYSIS: CSR

By Greg Peel

When it comes to the current share price of building products manufacturer CSR ((CSR)), FNArena database brokers are split. Three Buy or equivalent ratings match three Sells along with two Holds, suggesting consensus has CSR now ahead of valuation. All brokers are supportive of the proposed merger between the east coast brick operations of CSR and sector peer Boral ((BLD)), but given potential ACCC interference analysts are not yet counting any chickens.

CSR’s share price has run up 40% in less than a year in line with an improving outlook for the Australian housing market. But despite this gain, and a rather “full” looking 18x PE multiple on FY15 forecasts, stock broker Moelis believes the rally has only just begun. The company’s FY14 result, due on May 14, will provide evidence, Moelis suggests.

CSR’s FY14 profit forecast of $70m, representing a 100% improvement on FY13, is no more than company guidance suggests. But the broker sees the result as likely to highlight the operating leverage within the building products division, which provides around 85% of revenue. Revenue growth will be seen to have accelerated into the second half, Moelis believes, given 20% year on year growth in domestic housing activity and the “early stage” relationship between building products and housing construction. Revenue growth in the first half of FY14 was a mere 3%, with 19% earnings growth achieved through cost reductions.

The albatross around CSR’s building products divisions’ neck has long been the Viridian glass business, and turning the business around is management’s number one priority. Major restructuring has commenced, and while Viridian will continue to show a loss in FY14, FY15 should see benefits begin to flow with breakeven to follow in around 18 months from now, Moelis predicts.

CSR has also struggled in its aluminium division from a weak aluminium price and a strong Aussie dollar, but the broker sees both, and Viridian’s fortunes, all trending in the right direction over the next few years.

Moelis joins the FNArena brokers in lauding the proposed brick merger with Boral, but agrees with ACCC uncertainty and thus considers success a “wildcard” in terms of CSR’s valuation. The process could take quite some time, the broker admits.

FNArena’s Stock Analysis currently shows a consensus target price of $3.13 for CSR, which is around 15% below the current trading price, but individual broker targets range from $1.90 (BA-Merrill Lynch) to $4.15 (Credit Suisse). Moelis has set its 12-month target at $4.50, with a Buy rating.

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