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CSR share price drags sector lower on sombre outlook

The CSR Limited (ASX: CSR) share price is under pressure as the building materials supplier couldn’t give investors a reason not to take profit at its annual general meeting today.

The CSR share price fell 1.9% to $3.98 during lunch time trade but is still up nearly 44% since the start of the calendar year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up around 18% over the period.

Regardless, the CSR share price is leading the sector lower on Wednesday with the Boral Limited (ASX: BLD) share price giving up 1.5% to $5.17 while the James Hardie Industries plc (ASX: JHX) lost 1.3% to $19.12 at the time of writing.

No turnaround in sight

The outlook for building materials companies should be improving but that wasn’t quite the impression that investors got today from CSR as management said volumes in April and May have been largely flat on the March quarter even as it acknowledged the tailwinds for the industry.

Falling interest rates and improving credit availability should lift demand for homes, while last month’s federal election provided an extra boost to the housing market. The Coalition victory at the ballot box means Labor’s threat to remove tax incentives for property investment is shelved (if not permanently, it will be for a very long time).

The Morrison government is also giving first home buyers a helping hand with scrounging up the deposit for their home and the promised tax cuts will bolster consumer sentiment.

Getting burnt by high power price

But even then, CSR didn’t strike a happy note as it fronted shareholders – instead it complained about the high gas and electricity prices and warned that Australia’s inability to cap these costs will drive the local manufacturing industry into the wall.

The grumblings from the group’s chairman John Gillam is understandable as high power prices are costing CSR dearly. Earnings before interest and tax (EBIT) for its aluminium business has collapsed 54% to $36.6 million in the last financial year ended March 2019 when compared to FY18 and this can almost entirely be blamed on its high utility bill.

“Gas consumers in Australia now pay as much for gas as our Asian neighbours who have no local gas reserves,” said Mr Gillam at the AGM in Sydney. “This market inequity greatly hinders all parts of manufacturing.”

He is pushing for the federal government and the New South Wales and Victorian state governments to facilitate and not stand in the way of unlocking gas reserves in those states to drive prices lower and bring the manufacturing sector back to life.

Foolish takeaway

That may be a valid point but I thought the AGM didn’t give investors any reason to buy the stock – especially not after the big run-up in its share price.

If anything, I won’t be surprised to see the stock start to underperform from here. Those looking for stocks that can outperform in FY20 will have to look elsewhere and the experts at the Motley Fool have a few suggestions on where you should be hunting.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and James Hardie Industries plc. Connect with him on Twitter @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 Scott Phillips.

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