CSR On Firm Footing But Outlook Unclear

Australia | May 13 2020

CSR has shown only a modest impact from the pandemic and housing downturn so far but caution is urged as the outlook is far from clear.

-Able to withstand a prolonged downturn
-Caution is warranted as timing & extent uncertain
-Hedging efforts put aluminium on a firm footing


By Eva Brocklehurst

CSR ((CSR)) has managed, to date, to shrug off the housing slump and suppressed demand, posting profit and earnings in FY20 that defied more bearish expectations.

There was no final dividend declared, and no FY21 guidance offered, although Credit Suisse notes guidance was not provided at the FY19 result either. The broker does not expect a dividend in FY21 and also notes the company has paused its buyback.

Given the net company's cash position, Morgan Stanley was surprised by the dividend suspension but suspects this may be just the company taking a conservative stance, ahead of potentially difficult conditions later in the year.

Both the lack of a buyback and the dividend suspension are understandable, Ord Minnett asserts, given a weak outlook for building materials. The broker removes dividend estimates for the first half of FY21, while Citi assumes a modest 8.5c will be paid in FY21.

Citi observes the company is trying to create a more variable cost structure in its building product division and, given the net cash position, expects opportunistic acquisitions could be considered over the next year.

Credit Suisse acknowledges the stock has confounded sceptics and upgrades to Neutral. UBS also suspected social distancing measures would have slowed general activity in building to a greater degree but expects a trough in revenue is still to come, forecasting a fall of -18% in FY21.

While the company has indicated it can do more on margins this will depend on the depth of the trough. UBS forecasts margins to trough at 9.3% in FY21. Nevertheless, the broker takes comfort in the balance sheet and the proactive management of costs, allowing the company to withstand a prolonged downturn.

Wilsons was encouraged by the results, which revealed market share growth and margin resilience in building products. The broker remains confident that the robust balance sheet, aluminium hedging profile and attractive portfolio of property will provide support. As a result, the broker, not one of the seven monitored daily on the FNArena database, upgrades to Overweight from Market Weight with a target of $4.87.

Building Products

Building product revenues are down just -3% in the first six weeks of FY21. However, CSR's volumes have outperformed the market by more than 10% in FY20 and this is attributed to its product breadth and commercial segment gains.

The company has also indicated it does not expect commercial building projects to slump, pointing to the benefits from increasingly diversifying end market exposure into the commercial market.

Credit Suisse had always expected construction would withstand the early stages of the pandemic but now assumes CSR materially outperforms. That said, an expected -20-30% decline in volumes in residential/commercial construction over the next two years precludes a more positive view.

To Morgan Stanley the key to the outlook is the degree to which the pandemic affects an already-declining housing cycle and, hence, caution is warranted, although upgrades to Equal-weight. Management has signalled it expects an impact from the downturn at some point in FY21 and Morgan Stanley would also expect a risk to volumes as the final stages of the apartment boom ebb way.


Meanwhile, the company's hedging efforts and reduced input costs have put the aluminium business on a firm footing. CSR has hedged 63% of its output at $2826/t versus the spot price of $2250/t. Alongside CSR's updated aluminium price hedging, Credit Suisse now forecast FY21/20 to average realised prices of $2796/t and $2922/t, respectively.

UBS highlights an agile and disciplined trading division that has taken full advantage of the volatile conditions. While accepting investors do not buy CSR for the aluminium business, the broker welcomes the incremental improvements.

The superior hedging position and raw material benefits have contributed to a large upgrade to Ord Minnett's estimates. Further upside is expected to stem from either residential demand or building product prices being better than forecast. Cost relief for electricity at the Tomago smelter could also be supportive.

UBS lowers expectations for aluminium because of lower global demand, although agrees the better-than-expected hedging profile will help to boost earnings in FY21 and FY22.

The database has two Buy ratings and four Hold. The consensus target is $4.05, suggesting 8.7% upside to the last share price.

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