CSR Excels Amid Housing & Inflation Uncertainty

Australia | Nov 08 2022

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In the face of housing market and inflation concerns, first half results for CSR revealed the benefits of strong cost control and a proactive pricing strategy.

-First half results for CSR beat consensus forecasts
-Building products and property outperform, aluminium weighs
-Citi feels the current backlog for CSR mitigates downside risks
-No material changes to broker target prices

 

By Mark Woodruff

Despite rising housing market and inflation concerns, first half results for CSR ((CSR)) beat consensus broker estimates on the back of strong cost control and proactive pricing.

Most of the 11% revenue growth for the core Building Products segment was driven by price and good operational execution, according to Macquarie, during a period of elongating build cycles that are helping to extend the pipeline.

Largely due to price, margins in Building Products expanded by 60 basis points and, looking to the future, Citi notes industry research suggests 7-15% price rises were taken on CSR products across the board in September.

Ord Minnett also points out plasterboard players are looking to 17.5-20% price rises in January 2023. This broker expects a cumulative rolling benefit of annualising price rises will be maintained in the current rational competitive backdrop, helping to maintain margins.

Management guidance for Property was stronger than expected though Macquarie believes this was neutralised by coal-based cost pressure in the Aluminium segment. While 95% of net aluminium exposure is hedged, these coal costs are thought to be materially undermining the division’s FY23 outlook.

Coke pricing was one factor in the Aluminium segment underperformance, notes Goldman Sachs, along with greater-than-expected inflationary pressures stemming from labour, transport and warehousing.

Overall, Macquarie feels CSR has done a good job in offsetting cost inflation through price discipline. A new gas contract extends cover to 2027 though still requires double-digit price increases to offset the impost in high energy-intensity products, like bricks. It’s felt a struggling customer base could also start undermining this pricing power.

In terms of cost and margin, Jarden notes the company has a rolling 12-month hedge for the electricity price and it recently signed a gas supply contract with Shell to 2027. Management aims to achieve product price changes on a “CPI plus” basis.

Citi backs up its Buy rating on CSR with an interesting analysis that concludes: the time to buy cyclical housing stocks may be closer than the market is expecting.

The broker expects house price falls to last longer and only bottom towards the end of 2023, with a -23% peak to trough fall.  Should historical correlations hold, housing-related stocks bottom and start delivering outperformance six to seven months before housing prices.

The analyst reminds investors house prices are separate to housing activity in this cycle and sees stable building volumes over the medium-term from the current backlog, flood repair work and potential government stimulus. It’s felt the backlog makes it safer to “go early” on CSR as the risk of mean reversion is materially reduced.

Given this backlog, UBS assigns a 49% weighting to second half earnings, up from the usual 45%, which aligns with management commentary around a strong second half.

CSR management also spoke of an extended cycle stretching into the second half of FY24, which UBS points out will allow CSR to benefit from a recovery in higher-margin multi-family homes as detached volumes finally decline.

Property earnings

Guidance for the Property segment earnings (EBIT) was raised to $68m from $52m and UBS believes management has done well by locking in significant earnings over the medium term.

The broker assigns a $2.32/share valuation to this segment, which broadly lines up with the company’s “as is” valuation of $1.5bn ex the operating properties that are expected to be realised in 10-15 years. It’s felt longer-term operational changes will unlock further land.

Outlook

Credit Suisse retains its Outperform rating on CSR’s attractive valuation and in the belief Building Products’ earnings will be more resilient than expected by consensus.

Equal-weight-rated Morgan Stanley feels the company is well positioned to benefit from elevated backlogs, though the market may focus on the medium-term impact of rising interest rates, while Ord Minnett (Hold) sees better relative value within the sector from Buy-rated James Hardie Industries ((JHX)).

Three brokers in the daily-updated FNArena database have a Buy or equivalent rating for CSR, while another three have a Hold or equivalent rating.

The average database target price was $5.53 prior to first half results, and $5.47 after, which suggests 15.2% upside to the latest share price.

Outside of the database, Jarden has an Overweight rating and downgrades its target to $5.50 from $5.65 after first half results. Neutral-rated Goldman Sachs increases its target by 5% to $5.40.

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