CSR Limited (CSR)

By Jason Fittler

History has shown us that corporate demergers generally unlock the sum-of-the-parts value of a conglomerate.

We think CSR, who has announced plans to separate its Building Materials and Sugar operations, will be no exception.

Speculation in the press is that CSR will move to raise capital before the demerger. BUY some now to participate in the expected raising and hold for the demerger, which will create separate Sugar and Building Materials businesses with strong M&A appeal.

Recent history points to outperformance through demergers. Conglomerates typically trade at a discount to their sum-of-the-parts because:

1) They lack merger and acqusition appeal,
2) Perceived lack of specialization, and
3) Earnings from one part of the business can often cause a drag on the rest of it.

CSR is no different, trading at a 10% to 15% discount to single-business peers.

A separately listed sugar vehicle is likely to have strong appeal to global commodity funds as one of the few listed pure sugar plays outside of Brazil. We expect the market will play the stock as a proxy for the global sugar price, which could see it trade well above net present value

A pure-play building materials business
is more likely to trade in line with peers (CSR has underperformed peers since the March lows). CSR is also benefiting from the Government’s $3.9 billion in handouts for private housing insulation.

The press have speculated a capital raising before the demerger which would help alleviate concerns that one vehicle may get structured with excessive debt