Boral, James Hardie Industries and CSR have rallied from oversold levels, as buyers have been attracted to the reduced PE multiples. The question is whether non-residential and engineering construction will offset the fall in residential construction volumes.
Australian housing approvals have been trending down for the past 6 months with Jan approvals of 172k, down 30% on the same time last year.
BLD, JHX and CSR are now under Algo Engine sell conditions and we remain cautious given the broader market index back drop.
We consider Boral as the best recovery opportunity, but expect short-term sell pressure to persist.
CSR reports its 1HFY19 earnings on Friday and the market is looking for EBIT of $170 – $180 million for the 6 month period.
Boral, James Hardie and CSR have all been under pressure from short sellers and we are expecting to see some reversal of this trade.
The building stocks, in general, are looking oversold.
Our ALGO engine triggered a buy signal on CSR at $4.64 on June 15th.
The “higher low” pattern is referenced to the $4.36 low posted in November of last year.
Internal momentum indicators are beginning to firm suggesting solid investor support in the $4.50 area.
CSR will pay a 13.5 cent dividend in November and we see a medium-term upside target around $5.45.
Our Algo Engine generated a buy signal recently in CSR and we recommend investors keep this name on their watch list.
$4.31 is likely to be a point of support as the stock price trades into a value range supported by a 5% dividend yield.
Last week, CSR management reaffirmed the FY19 earnings outlook for flat growth on FY18 numbers.
For this reason, we view the approaching opportunity as a “technical bounce” rather than the beginning of a prolonged uptrend.
Our Algo Engine generated a recent buy signal in CSR and the short term momentum indicators have now turned positive.
Our Algo Engine triggered a buy signal in CSR at $4.64. We suggest accumulating the stock within the $4.00 – $4.60 range.
CSR goes ex-dividend $0.135 on the 10th November and call options are available over the stock.
CSR lifted their H1 profit by 3.7% as the building products supplier benefited from the firm residential housing market.
However, the market was expecting a better result as CSR shares are down over 5% at $4.48 in early trade.
Our ALGO engine has triggered three sell signals in CSR in the $4.80 to $4.95 range over the last two weeks.
With the internal momentum indicators in “overbought” territory on the daily charts, we now see scope for a move back to the low $4.00 handle.
Reports about the health of the Aussie housing market vary depending on who is writing them; the RBA is suggesting the market is softening as household debt increases, while real estate agents look to foreign buyers to support higher prices.
Within this mix we have seen building stocks rally hard and are now beginning to look overbought.
Of the three major companies, CSR, JHX and BLD, our ALGO engine has triggered a sell signal on both CSR and JHX.
The internal momentum indicators on all three of these names are in extreme valuation ranges and and near their 52-week highs.
We believe it’s reasonable to expect a pullback from current levels and look for downside targets of $17.75 in JHX, $4.30 in CSR and $6.50 in BLD.
At the close of trade yesterday, our ALGO engine triggered a sell signal on CSR at $4.58.
This is the second sell signal in just over a month as shares of the building supply company are still trading within a “lower high” formation dating back the all-time high price reached at $5.25 on May 9th.
Fundamentally, much of the recent price rise could be attributed to the two hurricanes which passed through the USA, but that looks to have run its course.
Further, earnings growth per share for CSR is expected to fall up to 14% over the next three years.
With the recent EPS at 35 cents, this expected contraction could drag EPS down to 30 cents.
As such, our downside target over the medium-term is $3.70.
Boral reported FY17 results that were inline with market expectations, with underlying EBIT of $460m NPAT of $343m. A final dividend of $0.12 per share (50% franked) was declared, taking the full-year dividend to $0.24, up 7% on FY16 and representing a payout ratio of 82%.
FY18 forward dividend yield, based on $0.26, is 3.5%.
The investment case for Boral is the strength of Australian infrastructure and US housing, however, the trends within the housing and construction stocks look less than favorable.