CSR Limited paints bright outlook: should you buy?

The building supplies group is expecting the strong demand for its products to continue for the next year or two although volatile aluminum prices are a headwind. But the stock looks cheap in my view.

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If you were hoping that building materials company CSR Limited's (ASX: CSR) annual general meeting today would provide a catalyst to close the valuation gap between its stock and the sector, you'd be disappointed.

While the stock jumped 2% to its highest level this month of $3.57 in late morning trade, the stock is still trailing James Hardie Industries plc (ASX: JHX) by nearly 50% over the past six months and is lagging the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by around 6%.

But management did paint a bright outlook that hinted at further profit growth following its full year results in May that showed earnings at a five-year high.

CSR1

As I wrote then, the stock looks cheap and I think the stock will play catchup to the sector over the next 12 months and today's AGM presentation has reaffirmed my view even though the stock has not been performing to expectations over the past two months.

This is because CSR is weighed down by volatile aluminum prices that have been impacted by rising exports from China and declining inventories of the metal at warehouses run by the London Metal Exchange.

CSR's aluminum business is the second-largest revenue contributor to the group and accounts for 26% of total sales in 2014-15.

However, the falling Australian dollar is providing some buffer to the falling metal price and 59% of the aluminum business is hedged at an average of $2,311 a tonne for the current financial year and 21% hedged at an average of $2,499 a tonne for the next financial year.

What should please investors is the number of dwelling approvals and housing starts that have not been completed.

The number of completed projects is lagging behind approvals and starts and this translates to strong market demand for CSR's building products for a few years yet.

CSR2

Building products is the company's biggest business that accounts for close to 60% of total revenue and analysts polled on Reuters are forecasting a 10% increase in sales to $2.23 billion for the year ending March 2016.

The other pleasing thing to come out of the AGM is the turnaround in CSR's problem prone glass manufacturing division Viridian. The business managed to post a modest earnings before interest and tax (EBIT) of $3.1 million in 2014-15 compared to a loss of $14.9 million in the previous year and management is expecting further improvement in the business this financial year.

With a positive operating environment, growth in EBIT across all of its four divisions (building products, Viridian, aluminum and property), a yield of around 6% and its undemanding 2015-16 consensus price-earnings multiple of 11x make the stock a buy in my book.

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Motley Fool contributor Brendon Lau owns shares of CSR Limited. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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