CSR Earnings: Strong Backlog Shielding Sales From Housing Construction Slowdown; FVE Raised by 5%

We raise our fair value estimate for no-moat CSR 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.

With CSR’s building products segment looking much more resilient than originally anticipated, we now expect fiscal 2024 group sales to post a modest 1% fall on fiscal 2023, compared with a previous forecast of a sharp 13% decline. Although industry approvals for detached dwellings, which account for over half of building products revenue, are down 15% in the six months to September 2023 compared with the pcp, CSR’s pipeline is 50% above historical averages. This is set to drive activity well into calendar 2024, insulating CSR from the cyclical slowdown. Multiresidential construction, 17% of segment sales, also has a healthy pipeline of around two to three years of work. And approvals for nonresidential construction, 23% of sales, are at record levels, with particular strength in schools and health facilities.

Resilient volumes, combined with the out-of-cycle price increase, saw the operating margin for building products improve to 16.3% from 15.3% in the pcp, despite input cost pressures. We are now projecting a full-year building products EBIT margin of 14.9%, a 100-basis-point upgrade on our previous forecast and flat on fiscal 2023.