June 17 (Bloomberg) -- CSR Ltd., Australia’s second-largest maker of building products, is planning to spin off its sugar unit to take advantage of a 27 percent jump in prices for the sweetener in the past year and improving capital markets.

The demerger plan is targeted for completion by the end of the year ending March 31, the Sydney-based company said today in a statement. The sugar business is valued at A$1.2 billion ($958 million), UBS AG said in a report last month. CSR has a market value of A$2 billion.

Shares of CSR, Australia’s biggest sugar refiner, rose 6 percent on investor optimism for the plan, flagged by the company more than two years ago. Sugar is the best-performing commodity in the past year because of a world wide production shortfall.

“They’ll lose diversification of earnings but that will probably be viewed as less significant than investors now gaining a pure exposure to sugar and building materials separately,” said Will Seddon, who helps manage $250 million at White Funds Management Pty. in Sydney.

CSR, whose mills produce about 4 percent of globally traded raw sugar, rose 9 cents to A$1.59 at the 4:10 p.m. close of trade in Sydney on the Australian stock exchange. The stock has fallen 38 percent in the past year.

The company got 83 percent of its net income from its building products, aluminum and property and waste management units in fiscal 2008, according to Bloomberg data. It got 17 percent of net income from its sugar division.

Financial Crisis

The start of the global financial crisis last year delayed consideration of the plan, Managing Director Jerry Maycock said in the statement.

“Improving market conditions, combined with the stronger performance and outlook for the sugar business, means it is now an appropriate time to move forward with this proposal.”

CSR will split into a sugar and renewable energy company and a company holding its building products, property and aluminum units, the company said. Shareholders will be given stock in both publicly traded companies and will then be able to decide to invest in both or just one, Maycock said today on a conference call. The company has no plans to sell new shares in either business at this stage, he said.

CSR had a net loss of A$326.5 million in the year ended March 31 because of one-time charges for asset writedowns, restructuring costs and product liability. It had net debt of A$1.2 billion at March 31, 2009.

Right Rating

“As a conglomerate with diverse businesses it just wasn’t getting the right rating,” said Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management in Sydney. “If the businesses are very closely interlinked there’s some logic in having them under one umbrella, but when they’re so diverse it makes sense to de-merge.”

The response from the company’s banks has been positive, Chief Financial Officer Shane Gannon said on the conference call. He wouldn’t specify how the company’s debt will be shared between the two businesses.

To contact the reporters on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

Last Updated: June 17, 2009 02:52 EDT