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Good As It Gets For CSR?

Australia | May 12 2016

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

-Plasterboard competition heightened
-Power costs for Tomago likely to rise
-Scope for more capital returns


By Eva Brocklehurst

In delivering its FY16 results CSR ((CSR)) emphasised building work piling up for at least another 12-18 months, despite concerns of a peak in the housing market. On an underlying basis building product earnings were up 28% while Viridian glass more than doubled earnings, albeit off a low base. Aluminium earnings were flat.

The company also expects to achieve price increases in excess of cost inflation in FY17. Hence, Deutsche Bank, forecasts building product earnings margins to expand to 13% from 11.5% in FY16. The broker takes an optimistic view on FY17 profits on the back of this margin expansion and agrees the Australian housing market should remain robust.

Moreover, volume increases in aluminium at around 2.0% per annum combined with costs reductions should mean the company outperforms, despite weak aluminium prices. The broker expects aluminium prices to fall 4.0% in FY17 and rise 7.0% in FY18.

At the other end of the spectrum, Morgan Stanley believes the current situation is as good as it gets and downgrades to Underweight from Equal-weight. The current share price implies earnings from building products which are just too high, in the broker's opinion.

The main reasons for this view are that the market will looking through higher building product earnings in FY17 towards a weakening housing market, despite any measures from the Reserve Bank in terms of further cuts to the cash rate. Knauf Plasterboard is also envisaged raising the competitive threat level in 2017.

The broker also notes a high positive correlation to the Australian dollar limits support for the stock in a rate cutting environment. The broker expects similar risks in the wake of the FY16 results to what occurred after the first half result when the stock underperformed.

Macquarie also is concerned about the market outlook and continues to envisage limited valuation support for the stock, retaining an Underperform rating. The broker finds it difficult to envisage a win-win compromise on the step-up in electricity costs at Tomago aluminium smelter and, longer term, aluminium market fundamentals are weak and this will be felt in the price of the metal.

On the positive side, the company's brick joint venture has performed particularly well and Macquarie notes it is on track to realise $10m in synergies in FY17, at the top end of prior guidance.

Credit Suisse is also recommending caution when it comes to capitalising peak cycle earnings. While the momentum for building products should continue in FY17 the broker expects earnings to be weighed down by aluminium. In FY18 and beyond the pressure should be aggravated by the easing housing cycle.

At present the strong balance sheet and share price support from an on-market buy-back prevents the broker from taking a more negative stance and a Neutral rating is retained.

Brokers concede the company's commentary that the volume of dwellings approved but not yet started is large, with supply constraints appearing from a lack of labour in the building trade. This suggests activity will remain elevated for another 12 months before easing back.

Credit Suisse also acknowledges the aluminium price was better than expected in FY16 and strong volumes and cost cutting meant the company delivered a credible result. Yet, this is not expected to be easy to replicate going forward. Furthermore, there is the competitive threat in plasterboard, previously mentioned, as well as the step up in electricity costs at Tomago.

The balance sheet is in a cash position and the asbestos liability continues to fall, so Ord Minnett believes there is scope to increase capital management initiatives. On the broker's assumptions CSR has the ability to return a further $150m in cash following the current buy-back.

Citi also suspects capital returns and/or high-growth expansion or M&A could be on the slate, and believes the consensus outlook needs to be reviewed given the beat in the FY16 results. Buy-back support should leave the balance sheet under-geared by the end of FY17. The broker also highlights the quality in the dividend yield and retains a Buy rating.

There are three Buy ratings, two Hold and two Sell on FNArena's database. The consensus target is $3.58, suggesting 0.6% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 6.3% and 6.4% respectively.

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