CSR says home slump likely has another year to run

CSR says the housing downturn probably has another year to run, but not at the same rate of decline.

CSR chief Rob Sindel. Pic: Aaron Francis

Building products supplier CSR expects the housing downturn probably has another year to run, but says the bigger demand issue for the housing market is the 7.25 per cent interest rate buffer requirement for new borrowers.

CSR yesterday warned of mixed economic signals for Australian construction activity and said the credit tightening limit imposed by the Australian Prudential Regulation Authority was hitting the market and should be reassessed.

“The best place to start is look at the minimum assessment rate of 7.25 per cent, which I think is unrealistic for current mortgages,” outgoing chief executive Rob Sindel said. “Availability of credit is being squeezed in one part of the sector. It’s important to look at the assessment rate and their ability to pay the absolute mortgage rather than some arbitrary number.”

The CSR boss said he still sees good demand signals for housing over the medium term, propelled by strong population growth.

“The market peaked two years ago, so we are two years into a downturn already, so the notion that the world is going to end I think is incorrect. These things are usually pretty short and sharp and once you get through the election cycle consumer confidence generally picks up,” Mr Sindel said.

“Population growth in Australia is 400,000 per year and that requires 185,000 starts just before anyone does anything. So if it’s a 12-month moderation in volumes, which is what we’re saying, I don’t think it runs on much longer than that.”

CSR fell 1.47 per cent to $3.34 after posting a 14 per cent fall in annual net profit, with high electricity costs puncturing profits at its aluminium business.

Net profit from continuing operations fell to $181.7 million in the financial year from $210.6m previously and just shy of a $184m consensus forecast from analysts.

Statutory net profit plunged 59 per cent to $78m, in part because of losses associated with the sale of its Viridian Glass business last year for $155m.

Earnings from CSR’s core building products unit fell 4 per cent to $206.5m partly due to the company paying more for imported products as a result of changing product mix.

Its aluminium unit was hit by a 54 per cent slide in earnings to $36.6m from $79.5m. The producer was slugged an extra $61m in electricity costs after a new contract with AGL Energy started in November 2017.

The contract includes a clause which passes through coal costs which have surged in the last year, hitting its Tomago aluminium smelter in NSW where it owns a stake.

CSR said building products volumes in the first month of the year remain consistent with the last quarter but the outlook is less clear.

“Mixed economic signals make it difficult to predict building activity levels for the year ahead. CSR is making changes to its operating footprint and overheads to mitigate the impact on earnings,” CSR said.

Macquarie said while CSR’s volumes are holding in the short run, the outlook is uncertain and guidance is relatively vague.

“The group is reacting with cost reduction — a factor we believe will reduce downside operating leverage,” Macquarie said in a research note. “Having said that, industry feedback points to a really tough sales environment in new detached (52 per cent of building product sales), so visibility is challenged. The lack of visibility in outlook commentary is symptomatic of the sales challenges we have been hearing from builders.”

The company will pay a final dividend of 13c per share from 13.5c last year.

It shares closed down 1.5 per cent yesterday, at $3.34.