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CSR a potential takeover target as housing market rebounds

New housing approvals jumped 7.6% in seasonally adjusted terms in September, meaning a surge in demand for building materials may not be far off. In line with this, building materials suppliers are emerging as potential takeover targets as the residential construction market begins to recover.

Why is CSR in the spotlight?

CSR Limited (ASX: CSR) has been named as possible takeover target, despite its share price recovering to $4.65 (at time of writing) from lows of $2.69 in December.

The Australian reported yesterday that CSR “could be on the radar of a buyer” following a failed effort by GFG Alliance to buy the business around a year ago. CSR shares leapt nearly 10% yesterday, from $4.40 to $4.71, following the report.

CSR building brands include Gyprock plasterboard, PGH bricks and pavers, and Bradford insulation. Trading revenue from CRS’s building products division was up 1% in FY19 despite the subdued conditions in the Australian housing market with earnings before interest and tax (EBIT) of $206.5 million. CSR sold Viridian Glass from its building products division in early 2019, realising an after-tax loss of $60.9 million on the sale.

In the half year ending 30 September, CSR reported group EBIT down 16% to $113 million reflecting a lower result from the building products division. EBIT for the building products division was down 18% due to the slowdown in residential building activity. Revenue for the building products division was down 5% with lower volumes reflective of slower construction activity.

Statutory net profit after tax (NPAT) from continuing operations for the group was down 19% to $68.8 million from $84.7 for the FY19 half year. An interim dividend of 10 cents per share and a special dividend of 4 cents per share were declared, each 50% franked. CSR reported net cash of $142 million at 30 September. A $100 million share buyback is ongoing with $47 million of shares purchased as at the half year.

Results in the second half of the financial year are expected to be lower than the first half due to seasonality in volumes. NPAT for the year ending March 2020 are expected to be between $107 and $133 million. Medium to long term growth is expected to be supported by population growth, high employment, and low interest rates.

Foolish takeaway

CSR can expect to benefit from a recovery in the housing construction market as well as government infrastructure spending. The company has taken advantage of previous strength in the Australian property market to lower cost structures and improve efficiencies, making it an attractive target.

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. 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.