Brokers may be upgrading this ASX stock even as it delivered a plunge in profits

The CSR Limited (ASX: CSR) share price will be in the spotlight today after it posted a big drop in underlying profits.

But the decline is better than what brokers were forecasting and could give the underperforming building supplies group a much-needed boost.

The CSR share price shed more than a quarter of its value since the start of the year when the S&P/ASX 200 Index (Index:^AXJO) lost 18% of its value.

COVID-19 impact on sector

Stocks exposed to housing construction have been doing it tough as the COVID-19 pandemic threatens to bring housing activity to its knees!

CSR’s peers, James Hardie Industries plc (ASX: JHX) and Boral Limited (ASX: BLD), have also been doing it tough. The JHX share price lost 22% and the BLD share price surrendered close to 40% since January.

Shareholders in CSR will be hoping for a bit of respite after management announced a 60.6% jump in full year net profit to $125.3 million.

NPAT beats expectations

This was due to impairment charges it took in the previous financial year, although if you excluded this, underlying net profit “only” declined 25.8% to $134.8 million.

I say “only” because consensus estimates were predicting a more than 30% plunge to around $120 million.

The group’s Building Products revenue fell 6% to $1.6 billion due to weakness in the housing market even before the COVID-19 outbreak, but this is a good number given that residential construction activity was down 21% on average.

Its aluminium business helped offset some of the losses with the division posting a 63% increase in earnings before interest and tax (EBIT). This isn’t unexpected as input costs stabilised in the second half of the year while the lower Australian dollar provided another uplift.

Building on solid ground

Investors will also find it reassuring that management is yet to notice any material impact from the coronavirus on its operations. The first few months of FY21, which started on 1 April, have been pretty steady with sales at its Building Products division dipping 3%.

CSR claims to have a strong balance sheet with net cash of $95 million, but management is taking no chances. It cancelled its final dividend, suspended its on-market share buyback and secured an additional $200 million in debt.

Foolish takeaway

But the group isn’t out of the woods. While the coronavirus hasn’t derailed demand for its products, management believes its only a matter of time before it’s impacted.

The problem is CSR doesn’t know when that might happen or to what extent earnings will suffer.

This is likely to temper broker’s willingness to upgrade their forecasts on the back of the better than expected FY20 profit results.

Shareholders should enjoy any bump in CSR’s share price today as it’s going to be an anxious few months.

More reading

• Is it time to invest in shares or wait on the sidelines?
• In a post-COVID world, could Australia be the next superpower?
• 5 things to watch on the ASX 200 on Tuesday
• 3 cheap ASX 200 shares for value investors
• The latest ASX shares to be downgraded by top brokers

Motley Fool contributor Brendon Lau owns shares of James Hardie Industries plc. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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