Building products manufacturer CSR Limited (ASX: CSR) announced its full-year results for the year ending March 2023. What followed was quite a subdued reaction in the market; however, there were a few noteworthy highlights. CSR reported a 17% increase in NPAT (before significant items) and declared a final dividend of $0.20, up from $0.18 in the previous year. This brings the full-year dividend to $0.365 per share and falls in the top end of CSR’s policy of 60-80%. CSR will trade ex-dividend on 29th May 2023, and the final dividend payment date is on 3rd July 2023.
Property Business Delivers Highest Result in 15 Years
CSR has demonstrated a remarkable operational performance, boosting its results for the third consecutive year. The company’s revenue reached $2.6 billion, marking a significant increase of 13%, while their earnings before interest and tax (EBIT) before significant items grew to $330 million, also up 13%. Despite inflationary pressures, CSR’s costs are not outpacing revenue growth, indicating that the company is successfully passing on added costs to their customers.
Compared to last year’s net profit of $193 million, CSR’s net profit after tax (before significant items) surged by 17%, amounting to $225 million. However, the company’s statutory net profit after tax fell to $219 million from $271 million, which included the recognition of an $86 million benefit from carry-forward capital tax losses from the previous year.
The boost in net profit was primarily driven by the Building Products business, which saw earnings rise to a record-breaking $273 million, up by 20%. This was mainly due to the strong product availability for customers, good volume growth in Gyprock and Hebel, and continued focus on operational efficiency and cost management.
Meanwhile, the Property business increased earnings to $72 million following the completion of six major transactions during the year. This was the highest result in Property over the last 15 years, highlighting the strength and depth of CSR’s Property team in delivering complex transactions with long lead times. CSR has also contracted an additional $102 million in Property earnings, to be delivered over the next two years. Currently, CSR’s property assets are valued on an “as is” basis of $1.5 billion.
On the other hand, the Aluminium business earnings declined to $8 million from $40 million due to the sharp increase in raw material costs, including coke and pitch, which reached historic highs during the year. Despite the challenging market for aluminium in the year ahead, CSR has implemented higher hedged pricing to ensure greater profitability in the coming years.
78% of EBIT comes from Building Products
The performance of Building Products, which is CSR’s largest segment, plays a crucial role in the company’s earnings and dividends. CSR has demonstrated pricing discipline across the business and continued to prioritize cost management. Building Products, including Gyprock, Bradford, and Hebel, saw revenue growth across all of its businesses, with Hebel continuing to gain market share with its faster build times and large installer base. The segment’s EBIT rose by 20%, with strong cost control helping to increase the EBIT margin to 15%.
The Interior Systems segment, which includes CSR’s largest business, Gyprock, witnessed increased earnings, reflecting volume growth, good market execution, and the strength of its brand position. Gyprock’s operational improvement and cost discipline across its diversified market position have further supported this growth.
Masonry & Insulation, which comprises PGH Bricks, Bradford Insulation, and Monier Roofing, also witnessed an increase in earnings, driven by rising demand for energy-efficient products and a strong detached housing market. CSR’s domestic manufacturing capacity across its 15 sites in this business has further strengthened its position.
Furthermore, Construction Systems recorded a lift in earnings, owing to strong volume growth in both Hebel and Cemintel, as the business increased its share of non-residential markets. AFS also increased volumes as it expanded its reach across new markets and segments. Hebel’s growth can be attributed to its compelling offer to customers, with further work underway to expand across more panel profiles and finishes.
Strong Cash Position Supports Dividends
CSR ended the year with a robust financial position, enabling continued investment in core operations to enhance capacity and productivity. The company has also expressed its intention to pursue targeted and synergistic acquisitions for growth opportunities.
Backed by its strong financial position and outstanding performance, CSR was able to pay fully franked dividends at the top end of their range of 60-80% of net profit after tax (before significant items). The company announced a final dividend of $0.20 per share (fully franked), bringing the full-year dividend to $0.36 per share (fully franked), a 16% increase compared to the previous year.
In June 2022, CSR launched an on-market share buyback program of up to $100 million to enhance shareholder returns, consistent with its proactive capital management approach. As of now, the buyback program remains ongoing, with shares worth $36 million already purchased. Given CSR’s robust balance sheet and strong operational performance, the company can invest in growth opportunities while simultaneously increasing returns to shareholders.
At current prices, the full-year dividend represents a yield of 6.8%. Following the dividend payout and the share buyback, CSR will still have $132 million in cash.
Outlook & Valuation
CSR’s Building Products has started the year on a positive note, with a strong pipeline of detached housing projects under construction, which is contributing to historically high levels of activity in the housing market. The company is focused on executing into end markets and maintaining pricing discipline to manage inflationary cost pressures, which has been supporting revenues. CSR says that they are closely monitoring market dynamics and will adjust its business strategies accordingly.
The apartment market is also showing signs of improvement as more projects have commenced this year, while non-residential activity remains strong, supported by a large pipeline of approvals. Due to the shortage of workers, there is also a backlog in the construction of already approved projects. The delays have increased build times, and it has grown CSR’s pipeline. CSR’s incremental investments in manufacturing performance, plant consolidation, supply chain, and customer solutions have improved manufacturing productivity, the variability of the cost base, and responsiveness to customer demand.
In Property, the company has $44 million in contracted earnings for the next tranche at Horsley Park, NSW, with an additional $58 million in contracted earnings in FY25. Work also continues on major projects at Darra, QLD, Schofields, NSW, and Badgerys Creek, NSW.
Forecasting is challenging in the Aluminium segment due to cost volatility and unpredictability in energy and raw materials. The company’s best estimate for FY24 is a loss in the range of -$5 million to -$15 million (excluding net RERT income, which was $13 million in FY23). Aluminium is expected to return to profit in FY25 and increase in the following years due to higher hedged pricing based on current cost assumptions.
Regarding what is priced-in, consensus expects revenues and NPAT to decline in FY24 to $2.48 billion and $185 million, respectively. Considering CSR’s outstanding shares remain the same, the NPAT should translate into an EPS of $0.39 in FY24. Based on CSR’s track record, we can again expect the firm to stick to its 60-80% dividend target range. A similar upper end of the range would imply that CSR will pay out around $0.30 a share in full-year FY24 dividends.
CSR is currently trading at just 13.8x forward FY24 P/E and 7.2x forward FY24 EV/EBITDA – indicating that CSR is being modestly priced.
CSR has been largely successful in passing on inflationary costs to its customers. A continued strong underlying demand for building products and good pipeline visibility already exists. Therefore, we can expect CSR to outperform market consensus in FY24, in addition to healthy dividends.
CSR announced a dividend uplift in its FY23 results – paying $0.365 a share in full-year fully franked dividends (ex-dividend date: 29th May 2023). Strong performance from its biggest segment Building Products, drove revenues and earnings. The Property segment also performed well, while the Aluminium segment profits succumbed to higher material costs. Ultimately, there was a 17% growth in NPAT before significant items, leading CSR to pay dividends at the top end of its policy.
Markets have priced-in bearish numbers for FY24, and we think there is an opportunity for outperformance. The company has been operating at a high level, managing to pass on inflationary costs to customers and ensuring a good pipeline. The existing demand for building products ensures the outlook remains positive. Therefore, we maintain our ‘Buy‘ recommendation on CSR.