BUY HOLD SELL – CSR Limited (ASX: CSR)

CSR (CSR) has announced an on-market share buyback of up to $100m and reaffirmed its FY23 outlook. Management highlighted the solid performance of its Building Products segment which is its largest revenue contributor at 72%, Aluminium sits at 13% and the balance is made up by Property at 12%. No hard numbers were offered in the guidance but the market will likely be pleased with the buyback which will improve EPS and support the share price in the coming months. Full-year results were released only a few weeks ago with underlying profit coming in ahead of consensus and a final dividend of 18c up from 14.5c a year earlier. The 85% rise in profit wasn’t enough for the market with the stock down more than 27% since the release. The share price topped out just before FY results. RSI has just moved back from oversold territory with the share price finding support at the 400c level. The outlook for the business is centred around labour shortages and supply chain disruptions which means an already strong pipeline of work in the detached housing market is stretching out to be “stronger for longer”. CEO Julie Coates foreshadowed further price rises of products to offset rising input costs. What has weighed on the business is the outlook for housing activity. Macquarie recently cut earnings forecasts by 7% and 5% through to FY25 citing house activity headwinds. Higher interest rates, inflation and slowing growth weighing on sentiment.

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The average broker target price suggests upside of more than 50%. Full-year results met or beat expectations. Citi believed margin expansion is on the cards given a positive pricing environment and the company's manufacturing leverage. Credit Suisse was pleased with how the company has managed supply chain disruptions. All of CSR's Building Products segments delivered earnings and volume growth over the year. Morgan Stanley saw a bright outlook for Building Products with a strong pipeline in detached. Main observations:

• ROE is excellent at 20.5%. Peer JHX sits on 45.7x. The majority of JHX’s revenue comes from North America although they are experiencing a similar housing environment as us.
• EPS growth is expected to improve this year, that is likley before factoring in today’s buyback announcement.
• CSR is on a PE of 9.7x which is cheap, JHX sits on 13.2x. CSR is trading at a big discount to its average PE multiple (blue horizontal line) which is 14.53x. If history is anything to go by, the stock tends to bounce after hitting a PE of ~8.5x

• The company has a fantastic yield. A gross yield of 11.6% is very attractive. Consistency leaves something to be desired but forecasts anticipate that to become more of a feature in the next few years.

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More about the author – Tom Wegner Tom has been working at Marcus Today Stock Market Newsletter since 2016. He graduated from Monash University and is the author of the much-loved BUY HOLD SELL section of the newsletter. Tom has a natural curiosity in financial markets and is passionate about helping his peers become better investors.