EUR 850.00 For Business Accounts Only

Morningstar | No-Moat CSR Divests its Value-Destructive Glass Products Business; FVE Unchanged

After extended speculation, CSR will sell its architectural glass business, Viridian Glass, to private equity for AUD 155 million. The deal was struck at an approximate 7 times our forecast fiscal 2019 EBITDA, which we view as reasonable given glass peer trading multiples. With deal completion expected in January 2019, it has negligible impact on our fiscal 2019 earnings estimates. Looking further out, however, we now expect a five-year top-line CAGR of negative 2.3%, down from positive 0.7% resulting from the loss of Viridian sales. But the divestment of low-margin Viridian will see group EBIT margins improve and average 10.6% over the coming five years, up from our prior expectation of 9.9%. Our fair value estimate of AUD 4.10 per share remains intact. As such, CSR shares continue to look cheap, currently trading at a 27% discount to fair value.

Divestment appears the right course of action. Viridian is Australia’s largest architectural glass manufacturer and came to fruition when CSR acquired Pilkington Australia and DMS glass in 2007. But significant competition from cost competitive imports has dogged the business. Viridian’s manufacturing capacity is globally subscale, and the resulting returns have been poor. Returns on invested capital for the segment have averaged around 1% for the prior five years, comparing unfavourably with cost of capital, estimated at 9.6%. With the Viridian business at a competitive disadvantage, we continue to believe through the cycle economic profitability is unachievable. We commend the sale of the business on this basis.

The sale is set to further enhance CSR’s balance sheet strength. Net debt/equity stood at 5% at fiscal 2019 half-year end in early November and Viridian sale proceeds will provide CSR with further flexibility to return capital to shareholders in excess of the ordinary dividend.

While CSR is yet to fully reveal their intentions, we expect a capital return in either the form of a special dividend or share buyback to be announced at the fiscal 2019 full-year result in May. We see potential for further capital returns in fiscal 2020, with roughly half of the sale proceeds to be received in the first half of fiscal 2020. We also see proceeds from the sale of the land at the Viridian site in Ingleburn, New South Wales, as a further source of surplus capital in fiscal 2020. With the Ingleburn site having not formed part of the today’s announced Viridian sale, CSR expects to sell the site in fiscal 2020, with proceeds of AUD 60 million anticipated.