share price needs re-evaluation

Before reading my following comments please note my disclaimer at the bottom.

We know that CSR operates in cyclical industries. But in my view, the CSR share price has been undervalued for some time.

The disposal of Sucrogen and the Asian insulation business will transform the company into a predominantly domestic building products enterprise with an attractive investment in an aluminium smelter joint venture and a significant reduction in borrowings. Management should concentrate on regularising future earnings by improving efficiencies and margins within the existing operation. Possibly, some small bolt-on (debt free) acquisitions could be added along the way to enhance earnings flows. The company should also maintain expiration of the Dividend Reinvestment Plan (DRP) to ensure future earnings for shareholders are not diluted.

Below are my own quick broad calculations.

These calculations are based on operating segment results in the annual reports (averaged for last 7 years), ongoing effective management performance, a significant reduction in debt occurring using part of the Wilmar and Asian insulation business proceeds, and provided management can get Viridian running profitably. We also have to assume that the loss of profits from the Asian insulation business is approximately compensated for by savings on interest payments.

The company, without Sucrogen and the Asian insulation business, should aim to generate (using conservative estimates) at least around $80 million net profit (after tax) annually as normalised earnings from building products. The aluminium investment should also produce about a $68 million normalised annual net result, moreso, if CSR raises its interest in the venture with some of the receipts from the businesses sold.

Annual net profit from property development activities has averaged $39 million per annum. However, these activities tend to fluctuate, so it might be more realistic to allow for around $30 million .

If the company can earn about $178 million net profit (after tax) yearly from these continuing operations, then this represents about $0.12 cents Earnings Per Share (EPS) for 1.5 billion shares on issue. If it is accepted that the average Price/Earnings ( P/E) ratio for a company of this type is between 10 to 13 times over the long-term, then the CSR (minus Sucrogen and Asian insulation) share price could be worth between $1.20 and $1.56, the midpoint being $1.38.

Additionally, directors are proposing a cash return of proceeds totalling $0.527 cents per share, comprising the mix of a return of capital and a fully-franked special dividend.

Add these calculations together, and a current fair market price should be in the order of about $1.91 (ie $1.38 + $0.527).

Of course these broad calculations rely on a lot of assumptions and do not allow for any significant unforseen events (positive or negative) arising which may impact the share price. Let us hope that a rational share price prevails in the market.


Disclaimer
Please note that I am not providing valuations, advice, information, recommendations or predictions. The above statements are merely my own calculations, comments and thoughts as an ordinary shareholder without any special skills or knowledge. I absolutely disclaim any responsibility or liability whatsoever for any consequences arising from the use of my calculations, comments and thoughts expressed. If you require advice or information, you should seek the services of an appropriately qualified independent expert professional person as well as do your own proper and thorough research.