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Morningstar | No-Moat CSR Delivers 1H Fiscal 2019 Result in Line With Our Expectations; FVE Unchanged

While slightly soft, no-moat CSR’s first-half fiscal 2019 result largely tracked our expectations. The group delivered underlying EBIT of AUD 143.8 million in the first half, leaving CSR well placed to meet our revised full-year fiscal 2019 EBIT forecast of AUD 279 million. Building products & glass earnings were stronger than we’d anticipated, but aluminium segment EBIT was softer due to rising raw materials costs. While we’ve reduced our full-year fiscal 2019 EBIT forecast by 7%, our long-term outlook for CSR is unchanged following the result and we reiterate our AUD 4.10 per share fair value estimate. After trading around 8% lower post the result, value is emerging in CSR shares, now trading at 20% discount to fair value.

Building Products EBIT of AUD 116.5 million was slightly ahead of our expectations, owing to revenue growth of 3% versus our forecast of roughly 1% gains. Despite the slightly better top-line result in the first half, we continue to forecast segment revenue growth of roughly 1% to AUD 1.7 billion in full-year fiscal 2019 with construction activity easing in the second half. Nonetheless, we expect EBIT margins to remain flat versus fiscal 2018 at 12.8%, with CSR’s plants continuing to run near full capacity, yielding an operating profit of AUD 215 million.

Our expectations beyond fiscal 2019 remain unchanged. We forecast a significant decline in multi-dwelling construction from unprecedented levels over the coming five years, partly buffered however by a more modest decline in detached dwelling activity, offset by growth in nonresidential construction. With CSR’s building products segment roughly two-thirds exposed to detached housing, we expect flat segment revenue through fiscal 2023, before returning to growth thereafter.

CSR remains conservatively capitalised, with net debt of AUD 69 million at half-year-end, making for a modest 5% net debt/equity ratio. An interim dividend of AUD 0.13 per share was declared and will be fully franked.

Despite a 14% increase in the realised price of aluminium, increased energy and raw materials costs saw aluminium segment operating income decline more than expected. The increased expense items saw operating profit decline to AUD 23 million, below our expectations for AUD 30 million. Alumina costs, which represent around 40% of total aluminium production costs, were expected at USD 387 per tonne in fiscal 2019 but prices have been significantly above this level during the first half. We now expect alumina costs of USD 422 per tonne in fiscal 2019 and we reduce our full-year fiscal 2019 aluminium earnings forecast to AUD 47 million, now closely corresponding with management’s guidance.

Meanwhile, the property segment result of AUD 4.3 million in EBIT tracked our expectations. CSR expects to report EBIT of AUD 31 million in the second half of fiscal 2019 relating to the sale of surplus land to operations at Horsley Park, New South Wales. We therefore marginally reduce our full-year property EBIT forecast, to AUD 35.3 million from AUD 40 million to reflect the lower end of management’s guidance for property sales.

The transition to fully franked dividends in fiscal 2019 has come ahead of schedule, with CSR having now fully utilised it’s carried forward tax loss position and moved into a taxable position. We had not expected this to occur until fiscal 2021. We continue to expect full-year dividends of AUD 0.27 per share but increase our franking expectations to 100% from our previous forecast of 75%.