Stock of the Week – CSR Limited (CSR)
CSR Limited is currently a hot stock in the news at the moment and is well known as the largest producer of raw sugar in Australia, with 40% of Australia’s raw sugar produced by CSR.
However CSR is also largely involved in three other principle businesses: building products, aluminium and property development across Australasia.
CSR has been talking about demerging its business into two new separately listed companies: one for sugar and renewable energy, and another for its building products, property and aluminium businesses.
China’s Bright Food Group has approached CSR about acquiring its sugar and renewable energy business for $1.75 billion, though today CSR positively surprised the market by revealing it has agreed to sell the division to a new bidder, Asian company Wilmar, for around $1.75 billion.
The asset sale will help CSR offset some of its debt, putting the company in a stronger place after recent trials.
Two Struggling Divisions
CSR’s shares dropped dramatically over 2008 into 2009 as the company suffered from two angles: a poor sugar industry and a dire building sector.
The writing was really on the wall back in October 2008, when CSR admitted to poor sales on a soft housing market, driven by higher interest rates, higher energy costs and slumping consumer confidence.
Although conditions have since improved, the stock still underperformed the market as investors were unsure of the combined effect of its exposure to two completely different industries.
On the one hand was a subdued housing market whilst on the other was a less cyclical, fairly defensive sugar industry.
CSR was facing challenges from a softer Australian housing market while its sugar business enjoyed improving refining margins and volumes.
In a bid to stage a recovery, CSR made the decision to demerge its business into two new separately listed companies: one for sugar and renewable energy, and another for its building products, property and aluminium businesses.
The market has been expecting a break-up of the company since 2003, when CSR spun off its Rinker heavy construction-products unit.
Early this year market attention regarding CSR switched to Chinese food producer Bright Food Group, which approached CSR about acquiring its sugar and renewable energy business for up to $1.5 billion.
In late January, CSR officially rejected the offer, stating it is committed to demerging its sugar and renewable energy unit.
Deal Is Done!
CSR pleasantly surprised the stock market today when it revealed it has reached an agreement with Asian agribusiness Wilmar International to sell Sucrogen for $1.75 billion.
The deal effectively closes the door on the Bright Food offer. Reportedly, Wilmar’s offer was higher in value and more certain than a formal offer Bright Food was planning.
CSR has now deferred its demerger plans for Sucrogen, pending the outcome of the sale process. If the deal falls through, CSR said it may proceed with the demerger.
The Wilmar deal, which should be complete by 4Q10, offers net sale proceeds of around $1.6 billion for CSR, or around $1.06 per share.
CSR said it would consider a range of capital management initiatives to utilise these funds efficiently, which the market is taking as implying it may consider an acquisition.
It is expected that the deal will also lead to some form of capital return to shareholders.
The deal is subject to the approval of Australian and New Zealand regulators.
FY10: Hanging in There
On 12 May, CSR reported an FY10 net profit before significant items of $173.4 million, representing a 29% increase from a year ago.
The result, which topped analyst expectations, was driven by a strong performance in CSR’s Sucrogen and aluminium divisions.
On a post-significant item basis, CSR reported a net loss of $111.7 million, which was largely due to a $250 million write-down in the value of its Viridian glass business.
CSR maintained a cautious outlook for its property division, although it was more optimistic over its sugar business.
CSR declared a full-year dividend of 6 cents per share.
Market attention regarding CSR has recently been focused on its demerger move and the takeover offer from Bright Foods – a story that has been ongoing since last year.
CSR’s stock started to fall as talks stalled over whether CSR is demerging or accepting a takeover offer. However, today’s news of a deal with Asian agribusiness Wilmar has seen the stock finishing the session up 3%.
CSR may use the net sale proceeds of around $1.6 billion to seek out acquisition opportunities or to offset some of its debt.
Investors should be heartened by the fact that CSR will likely use the cash to issue some form of capital return to shareholders.
Though CSR has faced market challenges of late in two of its divisions (building products and aluminium & property development), the news of the Sucrogen sale is a boon for the company, which has received a considerable cash boost.
As a result of today’s news, we are upgrading our rating on CSR from a Sell to a Hold.
The Australian stock price for CSR has been relatively choppy as of late, trading between $1.60 and $1.85, last closing at $1.715.