Good News Builds For CSR

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

-Growing capacity for returns, M&A
-Aluminium downside priced in
-Expands commercial exposure
 

By Eva Brocklehurst

Good news stories flowed from CSR Ltd's ((CSR)) investor briefing. The building materials business is taking advantage of a buoyant housing construction industry.

The company expects housing should remain strong until FY17, given the lag between approvals and completions has extended to nine months. Price increases of 8.0% and 4.0% in bricks and plasterboard, respectively, have been implemented. This, combined with the likely operating leverage, underpins broker expectations.

FNArena's database has six Buy ratings and one Hold (Credit Suisse). The consensus target is $4.17, signalling 31% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 6.9% and 7.8% respectively.

Citi was impressed with the outlook and the capacity in cash flow and the balance sheet. At an assumed gearing level of 30% this provides $1 per share in capability for capital returns or acquisitions, by the broker's calculation. However, Citi acknowledges that negotiations over the Tomago power contract may take precedent.

Aluminium remains the vulnerable division and recent share price weakness suggests expectations for lower ingot premiums are well and truly factored in. The proportion of net aluminium exposure hedged remains at 59%.

Negotiations over the electricity supply at Tomago have not yet formally commenced for 2017 but lower aluminum earnings may, Citi suspects, provide a catalyst for these discussions. UBS highlights welcome news that the higher cost for aluminium electricity from FY18 only covers part of the electricity contract.

Reinvestment in the Viridian glass business is underway, property earnings are expected to grow substantially in Sydney, the brick JV is working and there is good growth in innovative products such as Hebel and AFS walling. Demand is increasing faster than expected for Hebel product, which is driving the capacity expansion at Somersby. This should be completed by the end of the year.

Citi also observes a material reduction in the asbestos liability over the past three years that suggests, inclusive of M&A opportunities, an ability to accelerate shareholder returns. This is in spite of the looming end to seven years (Dec 2017) of required external oversight of repatriating capital to shareholders which, to protect potential asbestos victims, meant the balance sheet was significantly under-leveraged.

Deutsche Bank is more cautious, believing an external transaction is unlikely. The broker envisages the company could raise dividends but highlights its stated preference to invest in AFS and continue the value chain integration of Viridian. CSR has traditionally made 60-70% of glass sales to the residential market but, with commercial making up 45% of total processed glass consumption, the company is targeting growth in this segment.

Re-development works at the Schofields and Horsley Park plants continue. Schofields is expected to generate $400-450m in revenue post re-development at a 25% earnings margin.

UBS notes load-bearing formwork sales are up 250% over three years. CSR is also at the forefront of online sales and services customers with a mix of manufactured and imported sources. UBS still suspects the market will use housing approvals as its main indicator. Lags in work done may help profits for a year but then, the broker suspects, could just confuse the market.

CSR has a lead in developing these lightweight, fast-erecting building products and Macquarie observes this has enabled it to expand exposure to multi-residential activity. It also positions CSR well for structural trends. While aluminium weighs on the story, it only comprises 19% of Macquarie's valuation. Hence, the stock remains attractive and the broker retains an Outperform rating.

Macquarie believes the diversity of the offering and position in the market are key attractions, even from this late point in the cycle. Excluding aluminium from the valuation altogether still yields value.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms