CSR: Shares Outperforming Market Despite Cyclical Headwinds

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.

But shares in no-moat CSR CSR are outperforming the market. Even though half of CSR’s building products revenue comes from the challenged detached housing sector, CSR’s total return, including the AUD 0.20 fully franked final dividends per share paid in July 2023, has been almost 30% since the start of 2023, versus the S&P/ASX 200 gross total return index at 7%. Following strong price growth, shares now trade at an 8% premium to our unchanged fair value estimate of AUD 5.50 per share.

In our view, CSR’s recent share price appreciation partly reflects the strength of the company’s balance sheet. Despite the challenging macro backdrop and near-term earnings, CSR is in good financial health, with a fiscal 2023 net cash position of AUD 132 million, no debt, and just AUD 164 million in lease liabilities. A strong balance sheet facilitated fully franked fiscal 2023 dividends totaling AUD 36.5 cents per share, a payout of almost 80% of underlying EPS, and at the top of the 60%-80% policy range. CSR is also returning capital to shareholders via buybacks, having repurchased AUD 36 million in fiscal 2023 of a potential AUD 100 million program, albeit we calculate buybacks to be broadly value-neutral at current prices. We assume a further AUD 40 million of buybacks in fiscal 2024, with the remainder of the buyback program, around AUD 20 million, to be repurchased in fiscal 2025.