Building products and sugar group, CSR, would be on most lists of companies to be ‘hugged’ or ‘grabbed’ by a private equity group seeking an easy conquest.
Such is the company’s below par profit performance you have to wonder why that hasn’t happened.
Is it the fact that it operates in the highly political sugar industry in Queensland which would easily defeat any attempt by a financial buyer to get greater efficiencies and lower costs?
Or is its presence in the building industry and its continuing reliance on property development for a small but significant contribution to annual earnings that keeps the raiders at bay?
Certainly the involvement in aluminium isn’t of interest given there are pre-emptive rights and the metal output is heavily hedged which denies CSR the full benefit of strong world prices.
And now, thanks to lower results from sugar, a fall in property earnings and perhaps from building products, CSR is looking at a fall in 2008 earnings, after yesterday reporting a small drop for the 2007 year.
The shares fell by around 14c to $3.56, which is well under the $4 level when it was being touted as a buyout candidate late last year.
CSR said net profit was $273.3 million for the year to March 31, down from $305 million in fiscal 2006 and excluding significant items, the result was $240.5 million, a decline of 3.7 per cent.
The company said earnings before interest and tax (EBIT) was $406.1 million, down 2.6 per cent from $416.8 million.
All in all a ‘gentle decline’ and reflective of the company’s vague positioning and future prospects.
The new CEO, Jerry Maycock said in a statement accompanying the results that his early priorities for the coming year will be to assess further opportunities for growth, while focusing on a number of initiatives in each business to enhance performance and reduce costs.
“CSR has a great brand and an exciting future, albeit with shorter term challenges. At this early stage in the year, we expect the overall EBIT result is unlikely to reach last year,” Mr Maycock said.
(There was the bad news amid all the spin).
“The medium term outlook for our businesses is positive as we will begin to benefit from recent investments to improve performance and we have a number of interesting growth opportunities under review both in our current operations and by external acquisitions.”
CSR blamed the full year result on “external adverse market conditions for some of its businesses”.
Sugar profits rose with EBIT up 5.2 per cent to $130.1 million, despite interruptions to milling season caused by wet weather.
Wet weather reduced sugar production and yields and increased milling costs, offsetting some of the benefits of higher prices. But while sugar production will be higher this year, the emerging oversupply situation and volatile prices will push earnings lower.
Building products continued to be hurt by the ongoing slowdown in the residential housing market, particularly in New South Wales and while EBIT of $84.5 million was up from $80.9 million in 2006, that result was hurt by one-off costs of $20.6 million related to two plant closures.
When they were factored back in, the 2007 result was a truer 16.7 per cent lower. Still CSR reckons EBIT this year will be higher than the $84.5 million of 2007.
CSR said its 70 per cent share of Gove Aluminium Finance net profit before finance costs fell nine per cent to $70 million with the result hurt by lower hedged prices and higher costs.
Total aluminium EBIT was $141.9 million, down 9.1 per cent.
CSR said its property business produced another solid result although EBIT was down 7.8 per cent to $69.7 million and “This year, property’s results are expected to return to a more sustainable level in the range of $30 to $40 million per annum,” CSR said in the statement.
That will be a major factor behind the expected slide in earnings.
CSR said it “continues to pay a significant proportion of sustainable profit as dividends”. The final dividend to be paid on 3 July 2007 will be 9 cents a share, bringing total dividends for the year to 15 cents, fully franked.
CSR continued to generate cash strongly with cash flow from operating activities of $380.1 million, excluding the $196 million from settlements from insurance litigation, up 20 per cent from $317.1 million,
In July 2006, CSR announced a 12 month on-market buyback of up to 5 per cent of its shares. To date, $114.5 million has been invested to buyback 4 per cent of the company’s shares at an average price of $3.06 per share. Further opportunities for capital management are under review.
CSR said its financial position is strong, with gearing (measured as net debt/net debt plus equity) of 25.3 per cent, and net debt of $448.6 million. The company’s strong cash flow underpins its flexibility for growth.
And with such low debt and high cashflow, why haven’t the barbarians made a positive move on the company?
