Broker Goldman Sachs has upgraded building products manufacturer CSR Limited (ASX: CSR) to neutral. The revised 12-month target price has now increased by 20% to $4.64, from $3.86 previously. However, the CSR share price has been steadily dropping today, trading down 5.12% to the price of $4.72 at the time of writing.
Why was CSR upgraded?
Goldman Sachs noted that CSR’s earnings have significant exposure to residential construction activity, and historically its share price is closely correlated to the housing cycle.
However, the broker cited the recently released data for building approvals had indicated an improvement in the property sector. The data showed a rise in approvals for detached houses and private sector dwellings in the September quarter.
As a result, Goldman Sachs predicted that CSR’s building products revenue would improve modestly from a decrease of 6% in FY20, to a decrease of 5% in FY21.
The broker also expected a $20 million reduction in CSR’s selling, general administrative (SG&A) expenses in FY21, as a result of its ongoing cost restructuring programs. This ongoing “self-help” program is expected to improve CSR’s margins in FY21 and beyond.
Goldman Sachs also said the depreciating Australian dollar would have a positive impact on CSR’s bottom line, especially in its glass & aluminium unit where it competed against imported products.
In summary
Goldman Sachs has outlined three important factors for CSR’s medium term recovery – a quicker-than-expected residential housing recovery, a weaker Australian dollar, and its continuing cost reductions programs.
CSR’s share price performance
The CSR share price has experienced a wild ride in 2020. It began the year trading at $4.58 before dipping to its nadir at $2.82 in March as COVID-19 impacts took hold. It has since bounced back to today’s level of $4.72, a modest 3% increase YTD.
At today’s price, CSR has a market cap value of $2.4 billion.
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Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. 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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