Once again CSR has downgraded earnings: the diversified sugar and building products group is a serial offender as now there have been downgrades in each of the last three years.
Shares dropped by more than 7% as a result after the downgrade was issued and digested. The shares staggered back a fraction and then turned lower to close off 7.5%, or 15c lower, at $1./85.
The downgrade did confirm the danger of looking at investing in the company without an appreciation of the very variable nature of its business mix.
Sugar, aluminium, glass, building products and a bit of property should normally mean a mix of earnings streams and some solid cashflows.
It has been hit in the year to March by the stronger value of the Australian dollar, so the recent drop in the dollar should be an overall positive, but demand for sugar and aluminium is slowing and world prices have fallen.
But not for quite a while.
Sugar has been hit by volatile world prices and demand, not to mention weather in Queensland, building products by declining building approvals and demand from renovators, aluminium by the boom and bust in global demand and commodity prices and property by high interest rates, which have also impacted on housing demand.
And the outlook for the final six months doesn’t look that strong either with global and local levels of demand trending lower as recession looms in the US, Japan and Europe and activity here slows even further.
New Zealand’s woes are well known with the country’s economy in recession and building has taken a particularly hard hit.
The company reports its September 30 interim on November 5, but directors said yesterday that they could see the outcome for the year to March 30, 2009 being in line with the lower result for the year to March 2008.
The company told the ASX that group earnings before interest and tax (EBIT) before significant items would be in be in line with last year.
CSR reported that net profit before one-off items fell 35% to $177.4 million for 2007-08, while EBIT fell 5% to $386.3 million, in line with the company’s guidance.
In July, CSR indicated that group EBIT before significant items for the year ended 31 March 2009 were expected to be in the range of 5-10% higher than the previous year, noting the uncertain market conditions.
Management had warned when the 2008 result was released and in July that it faced a tough 12 months because of dwindling demand for new housing.
The company’s primary markets for its building products are the eastern states, especially NSW and Queensland, where construction activity remains flat to depressed.
The company sees some small benefits from the Federal Government announcement of a tripling of the first home owners grant for new homes, but any benefit to the company will take a while to appear.
”Consequently, while it is particularly difficult in the present volatile markets to predict earnings, CSR believes, on balance, that earnings before interest and tax of its building products division are likely to be lower than previously expected,” the company said.
The company said second quarter financial results across the CSR Building Products division reflected this patchy residential construction demand.
The company said the recent fall in the value of the Australian dollar against the US dollar would help its sugar and aluminium businesses, but current hedging levels meant that any meaningful benefit won’t show until the 2010 financial year which starts April 1.
The fall in the value of the Aussie dollar has a downside.
CSR said yesterday that its asbestos provision would also be affected by the recent decrease in the Australian dollar.
While the board was yet to consider the final amount of the provision, it was expected to result in an increase in the provision by around $50 million as at September 30, 2008. That could chew up much of the benefits from the lower currency in 2010.
The company says it will provide more guidance on November 5.
