Demand for materials remains firm for CSR, but industry supply and capacity constraints will limit growth for key products. This will stretch out the earnings profile in Building Products, just as headwinds are impacting the Aluminium business. Property earnings are looking good.
Demand for building products remains resilient. The large backlog of work from the Homebuilder government stimulus program and underlying demand is sustaining activity in CSR’s Building Products division.
Volume growth is likely to be suppressed due to on-going supply and capacity constraints which is therefore restricting potential sales. This is stretching the timeframe for building work to be undertaken rather than reducing demand.
Given the strong backlog of work and with price increases now emerging to cover rising costs, we think revenue growth will be healthy across FY23-24f before fading sometime in FY25f.
Margins have improved significantly in recent years, driven by price, mix and lower costs. CSR has been investing in new warehousing and distribution capability to lift margins further, but the benefits won’t appear until FY24f. Improvements (investment) in the transport management system are underway, but the company is yet to detail the benefits.
Coke and pitch costs are biting into Aluminium earnings. This division delivered EBIT of $39.7 million in FY22, towards the top end of management guidance. It could have been better if not for higher coke and pitch costs which look likely to be sustained.
Property earnings are set to increase. FY22 EBIT of $46.9 million was well ahead of disclosed contracted transactions for the year and a similar pattern is shaping up in FY23f. The ‘as is’ valuation for the Western Sydney portfolio has been lifted to $1.1 billion from $900 million with scope for more upgrades.
Investment view
The outlook for CSR remains good, but extraneous factors are extending timeframes for the Building Products division particularly. There is a strong backlog of work, just not enough materials to keep up with demand. An attractive dividend yield justifies continuing to own this stock, but the softening of earnings momentum draws our recommendation back to a Hold.
Risks to investment view
The timing and severity of the expected demand erosion is a key earnings risk. As interest rates rise, housing affordability may also dampen demand for CSR’s products.
Recommendation
We have lowered our recommendation to Hold from Buy.
