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Morningstar | Aluminium Earnings to Turn Marginal for No-Moat CSR; 20% Cut to FVE on Analyst Transfer

We reduce our fair value estimate on no-moat-rated CSR by 20% to AUD 3.30 per share following a transfer of analyst. Revenue expectations are unchanged. We expect a five-year top-line compound annual growth rate of negative 2.1%. We expect building products volume will weaken over the coming five years with Australian residential construction activity declining from its 2018 cyclical peak. Lower aluminium prices and lost revenue from the sale of Viridian Glass also contribute to declining forecast revenue.

However, we’ve revised our EBIT margin expectations lower, the key driver of the fair value estimate cut. We now forecast a more pronounced retreat in margins to an average of 8.9% over the coming five years, down from our prior forecast of 10.6%. While margin expectations for building products are unchanged, aluminium margins will be more affected by soaring Australian electricity prices than we’d previously anticipated, leading to our lowered EBIT margin outlook.

We reiterate our high uncertainty rating. Cyclical building products markets and volatile aluminium prices introduce significant variability in earnings. Further, the high-fixed-cost base of the bricks business introduces significant operating leverage, which will damp building product margins as volume now falls. Australian dwelling completions have registered a sizeable five-year historical CAGR of 7.6%. We see a reversal now occurring with a prospective five-year CAGR of negative 4.7% expected.

Global aluminium prices and domestic electricity costs are expected to move in opposing directions in the coming five years. We forecast an aluminium price of around USD 1,700 per metric tonne by fiscal 2023, down from an elevated USD 2,044 per metric tonne in fiscal 2018. Aluminium earnings are anticipated to turn marginal as a result.

Nonetheless, a healthy balance sheet sees CSR in a good position to weather the impending cyclical downturn. We expect adjusted net debt/EBITDA of 1.0 times at fiscal 2019 year-end. We anticipate the balance sheet to remain in relatively good shape, with adjusted net debt/EBITDA increasing marginally to around 1.2 times by fiscal 2023.