CSR consists of three businesses: Building Products, Aluminium and Property.
Each is exposed to different cyclical forces.
Exposure to the Australian and New Zealand housing cycles, which is much more prominent after the sale of Sucrogen, must be recognised. Aluminium is exposed to commodity risk although hedging can reduce volatility.
The sale of Sucrogen sees a more focused Building Products and Aluminium group with different cyclical forces.
Pricing power is limited but some increases are achieved in a less competitive Building Products sector.
Hedging tends to protect Aluminium earnings to a fair degree.
The economic downturn of FY09 hit hard, forcing a cut in dividends. There is substantial leverage to a recovery in residential building activity.
Moderate earnings growth can be expected over the longer term.
The stock is only suitable for investors seeking a reasonable yield and accepting cyclical moves in earnings and share price.
Fair value of $3.75 reflects a PE of 13x the average 2012 and 2013 Earnings Per Share (EPS).
A moderate increase in 2012 and 2013 earnings from Building Products is expected the as housing activity recovers although commercial activity remains weak.
Higher aluminium prices and hedging should underpin Aluminium earnings although a lower contribution is expected in 2012.
Post the Sucrogen sale we expect a 39% jump in EPS in 2012 but more moderate growth over the longer-term.
The return on capital should improve in the next few years although I am not buying this share right now it is one to keep an eye on.
For more information on CSR please contact us on 07 4771 4577.