Security price: $3.38
Industry: Building Materials
Forecast distribution: 24c per share
Building products ­provider CSR has four major ­divisions: building products and aluminium are the largest, while property and glass maker Viridian are far less significant.
The company’s fortunes are unsurprisingly tied to the building cycle, which saw earnings rise strongly through the recent property boom, ostensibly peaking in financial 2016. As a result, investors have begun to shy away from CSR, causing volatility in its share price.
But CSR has built an attractive distribution yield, bolstered by a $150 million buyback. Such a high payout ratio is facilitated by strong operating cashflow and an existing net cash balance sheet position.
With CSR continuing to deal with an asbestos liability, the buyback is a strong positive signal to the market it can continue to meet those obligations and return capital.
The buyback is also prudent from a tax perspective given CSR’s dearth of franking credits.
To many market pundits, ­acquisition-led growth is the most desirable outcome given the need for CSR to diversify earnings away from its underperforming aluminium division.
For dividend seekers, the buyback is likely a welcome extension of an already attractive yield.
But until CSR reduces exposure to aluminium, its pricing will continue to be a significant source of earnings volatility. This exposure also carries leverage to the strength of the dollar.
But the biggest risk remains the building cycle.
Residential housing approvals (trend) have fallen consecutively for the past 11 months, while the value of total buildings approved also fell for the seventh time in as many months. Weakness in the market has been reflected in the share price, but a change in activity ­either way would significantly impact on earnings momentum.
Our base-case valuation for CSR is $3.27 in 2016, moving marginally higher to $3.32 in 2017. CSR’s volatility and mixed outlook require a larger margin of safety to protect investors against downside risk.
As an income stock, it will be most attractive when trading at a heavy discount to value that ­reflects a bear-case scenario.
That said, investors should be aware of possible positive catalysts such as acquisitions, divestment of the aluminium business, or any significant recovery in the construction sector.
Damen Kloeckner is an associate analyst at Clime Investment Management.