Company Reports

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fiber cement, aerated autoclaved concrete, and a variety of complementary building products. CSR manufactures and distributes recognized brands such as Gyprock plasterboard, PGH bricks, Monier roof tiles, Bradford insulation, and Hebel panels. It also holds a 25% effective interest in the Tomago aluminum smelter in a joint venture. Property development of surplus and excess land is also a key valuation driver, with a property portfolio valued at over AUD 1.5 billion.

We recommend shareholders of no-moat CSR vote in favor of the proposed acquisition by Compagnie de Saint-Gobain, a French building product conglomerate, provided it is consistent with your investment goals. CSR directors unanimously recommend the deal. The consideration of AUD 9.00 per share comprises AUD 8.88 in cash and AUD 0.12 in fully franked dividends. The acquisition price is within the independent expert’s valuation range of AUD 8.25-AUD 9.26 per share, who concluded the scheme is fair and reasonable.

CSR entered a binding scheme implementation deed with French building product conglomerate Compagnie de Saint-Gobain, or Saint-Gobain. The AUD 9 per share cash offer for CSR, less any fully franked dividends paid, first unveiled on Feb. 20, 2024, is attractive. It represents a 33% premium to the undisturbed closing price before the proposal on Feb. 20, 2024, and a 13% premium to our stand-alone valuation.

Saint-Gobain has entered into a definitive agreement to acquire CSR, a building products producer in Australia, for an enterprise value of AUD 4.5 billion (EUR 2.7 billion). We believe the likelihood of CSR shareholders accepting the offer is high given the 33% premium, above the one-month volume-weighted average price and 13% premium to our stand-alone AUD 8 fair value estimate for CSR, prior to the announcement. The acquisition is consistent with Saint-Gobain's strategy to be the leader in light construction materials, which are more energy-efficient and easier to install than traditional building materials. The deal will also bolster its geographic presence outside of Europe where the outlook for construction activity remains weak. We maintain our no moat rating and EUR 68 fair value estimate.

No-moat CSR has a conditional nonbinding indicative proposal from French conglomerate Saint Gobain to acquire all of CSR shares. The cash and CSR dividend proposal of AUD 9 per share implies a 32% premium to CSR’s undisturbed closing price on Feb. 21, 2024.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fiber cement, aerated autoclaved concrete, and a variety of complementary building products. CSR manufactures and distributes recognized brands such as Gyprock plasterboard, PGH bricks, Monier roof tiles, Bradford insulation, and Hebel panels. It also holds a 25% effective interest in the Tomago aluminum smelter in a joint venture. Property development of surplus and excess land is also a key valuation driver, with a property portfolio valued at over AUD 1.5 billion.

We raise our fair value estimate for no-moat CSR by 5% to AUD 5.80 per share, with shares screening roughly fairly valued. Despite a challenging housing construction backdrop, CSR’s building products business posted sales of AUD 1.009 billion in the first half of fiscal 2024, 11% above the previous corresponding period, or pcp. First-half building product EBIT reached a record AUD 165 million, up 18% year on year. Previously, we had factored in material volume declines for building products in fiscal 2024, reflecting the ongoing deterioration in detached dwelling approvals. But a strong backlog and an out-of-cycle price increase in the second half of fiscal 2023 have seen CSR’s sales decouple from the broader economic environment. We revise our near-term outlook accordingly.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete. CSR manufactures and distributes widely recognized building product brands such as Gyprock plasterboard, PGH bricks, Monier roof tiles, Bradford insulation, and Hebel panels. CSR also holds a 25% effective interest in the Tomago aluminum smelter, with joint venture partners Rio Tinto Alcan and Hydro Aluminium. Property development of surplus and excess land is also a key valuation driver, with a property portfolio valued at over AUD 1.5 billion.

Australian housing construction faces a challenging outlook. With higher interest rates and cost inflation weighing on activity, data from the Australian Bureau of Statistics show total dwelling approvals have fallen 16% in the seven months to July 2023, compared with the same period last year. In July, dwelling approvals were almost 30% below the monthly average over the past 10 years. The picture is similar for dwelling commencements, which were down 7% in the first quarter of 2023 compared with last year.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete. CSR manufactures and distributes widely recognized building product brands such as Gyprock plasterboard, PGH bricks, Monier roof tiles, Bradford insulation, and Hebel panels. CSR also holds a 25% effective interest in the Tomago aluminum smelter, with joint venture partners Rio Tinto Alcan and Hydro Aluminium. Property development of surplus and excess land is also a key valuation driver, with a property portfolio valued at over AUD 1.5 billion.

Policymakers are increasingly cognizant of the significant contribution from the manufacturing processes, transport and disposal of building materials to the carbon-intensity of our built environment. Assessing the associated degree of carbon-risk associated with many building materials is a complex task—for detail, please see our special report “Combatting the Carbon Intensity of our Built Environment” dated July 27, 2021.

CSR’s ongoing land redevelopment success leads us to lift our fair value estimate for the no-moat company by 20% to AUD 4.80 per share with the unlocking of substantial latent value from CSR’s nonoperating land holdings underway. An improved operating margin outlook for the building products segment--with cost-reduction initiatives outperforming our expectations during fiscal 2021--is a minor contributor to the increase in our fair value estimate.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete, or AAC. CSR owns widely recognised building products brands such as Gyprock plasterboard. CSR sold the last of its sugar refining assets in 2010 to focus on building products, but it retains a 25% effective interest in the Tomago aluminium smelter, with joint venture partners Rio Tinto Alcan and Norsk Hydro.

The Australian Government’s targeted and highly effective fiscal support of the residential construction sector leads us to materially upgrade our near-term outlook for housing commencements and alteration and addition activity. Certainly, housing-related stocks under our coverage are set to benefit from the recovery in fiscal 2022, boosting earnings and improving balance sheet metrics. But with fiscal support for the sector now winding down, the valuation benefit of our upgraded near-term housing commencement forecasts to our housing-related coverage is modest at best.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete, or AAC. CSR owns widely recognised building products brands such as Gyprock plasterboard. CSR sold the last of its sugar refining assets in 2010 to focus on building products, but it retains a 25% effective interest in the Tomago aluminium smelter, with joint venture partners Rio Tinto Alcan and Norsk Hydro.

The impact of the coronavirus on Australian residential construction activity, house prices, and rental markets in 2020 has proven far less pronounced than we'd originally feared. Dwelling construction activity, house prices, and rents contracted during the height of the pandemic's shock to the Australian economy in mid-2020. However, a rapid reversal is now apparent in the final quarter of 2020, largely the result of highly effective fiscal stimulus directed toward the housing sector. Consequently, much-needed cyclical earnings relief is afoot for the building and construction materials sector. However, equity markets have already spotted the impending inflection point in construction activity and investor optimism abounds once more. With housing-exposed stock prices already incorporating the sector's imminent earnings recovery, we recommend investors look elsewhere in their search for value as the sector is likely to underperform in 2021. For further detail regarding our 2021 outlook on Australian housing, please see our report “Imminent Recovery Is Overbuilt Into Housing Exposed Stock Prices” dated Dec. 10, 2020.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete, or AAC. CSR owns widely recognised building products brands such as Gyprock plasterboard. CSR sold the last of its sugar refining assets in 2010 to focus on building products, but it retains a 25% effective interest in the Tomago aluminium smelter, with joint venture partners Rio Tinto Alcan and Norsk Hydro.

CSR is one of Australia’s leading building materials companies, producing bricks, plasterboard, insulation, fibre cement, and aerated autoclaved concrete, or AAC. CSR owns widely recognised building products brands such as Gyprock plasterboard. CSR sold the last of its sugar refining assets in 2010 to focus on building products, but it retains a 25% effective interest in the Tomago aluminium smelter, with joint venture partners Rio Tinto Alcan and Norsk Hydro.

No-moat CSR has sold a further tranche of its substantial land holdings that are surplus to the future operational footprint of its Australian brick manufacturing franchise. The sale of 8.6 hectares at Horsley Park in Sydney’s west is the third transaction CSR has undertaken at the rehabilitated site. CSR expects the AUD 84.3 million sale will generate an approximate AUD 48 million gain from the sale in fiscal 2024. While further latent value from CSR’s substantial land holdings has been crystallised for the benefit of shareholders, the rezoned and rehabilitated value of the Horsley Park site was already incorporated into our fair value estimate. Nonetheless, we increase our fair value estimate by 3% to AUD 3.50 per share, owing to the time value of money. CSR shares remain expensive in our view, trading at a material 31% premium to our revised fair value estimate.

Shares in no-moat CSR screen as fairly valued following the recent COVID-19 and oil price related sell-off in global equity markets. Having screened as expensive prior to the recent market rout, CSR’s shares now trade at an approximate 5% premium to our unchanged fair value estimate of AUD 3.60 per share. Certainly, the near-term repercussions of the COVID-19 outbreak for the Australian economy remain uncertain. While any contraction in economic activity could see CSR’s earnings weaken near-term, the outbreak of the virus has no bearing on our long-term expectations for dwelling investment nor for the resultant demand for CSR’s building products. Long-term prospects for Australian building materials names remain bright. We continue to expect growth in the Australian population to translate into sustained increases in the housing stock, driving earnings growth for CSR long-term.