Published 18 August 2006
Cavalier Corp Ltd made $14 million after tax & minorities in the June year, up 2% on the previous year. But directors said a more meaningful comparison of operating earnings, excluding substantial development costs, showed a 25% profit fall.
The development costs were associated with Cavalier’s Microbial bio-remedy project. The company wrote off $5.8 million tax-paid of development costs associated with that project in last year’s results.Managing director Wayne Chung said that, excluding the Microbial factor, the operating surplus from normal trading activities fell from $19.5 million last year to $14.7 million, in line with the forecast at the 2005 annual meeting. “The results reflect reduced earnings from our broadloom carpet business, because of the slowdown in housing activities across our main markets and the continuation of the softer market conditions that started towards the latter part of our 2004-05 financial year,” Mr Chung said.
Group operating revenue fell 3% to $202 million and the operating surplus before interest, tax & minority interests for operating activities (excluding the bio-remedy project) was $27.4 million, down $5.5 million, or 17%.Earnings/share rose 2%, from 20.9c to 21.4c/share.
The company ended the year with a slight increase in shareholders’ funds to $63.1 million. Net borrowings were unchanged, after substantial increases in the 2 preceding years. The debt:equity ratio stood at 49:51 and net interest cover for the year was 5.9 times.Net operating cashflow improved from $13.4 million last year, when there were substantial increases in trade debtors & stock, to $24.7 million. Cavalier bought $7 million of new assets and invested a further $3.6 million in its South Island wool scouring business.
Mr Chung said revenue from the carpet businesses was virtually unchanged at $158 million, including $38 million from the tile operation (up 13%). “This helped to offset the 4% decrease in broadloom carpet revenues.”Operating surplus (before corporate costs, interest & tax) for the carpet businesses was $27.3 million (down 16%).Mr Chung expounded at some length on the company’s markets, changes in market conditions and Cavalier’s outlook – an exercise probably worth doing in detail given the plight of carpet competitor Feltex Carpets Ltd:
Broadloom carpets
“The main markets for our broadloom carpets are in Australia & New Zealand and they can be broadly segmented into retail & contract.”Retail carpet is that sold to individual consumers through carpet retail stores and is mainly, but not exclusively, residential business. Contract carpet is sold in bulk, often by tender, for commercial installations. The 2 segments tend to follow different economic cycles, with retail associated more with consumer confidence & home building activities, and contract closely linked with business activities.”It is the retail segment that has slowed markedly over the past 18 months, initially in Australia and more recently in New Zealand. In contrast, the demand for contract carpet has remained strong on both sides of the Tasman. However, contract carpet is by its nature more price-driven & less profitable than retail business. Thus we have endured margin as well as volume erosion in this business, and these are reflected in the financial results.As of now, there are signs that Australian retail may have bottomed out, but New Zealand may still have some way to go. It is likely to be another 12 months before we again see earnings growth in the broadloom carpet business.Carpet tiles “Our carpet tile business, Ontera, operates entirely in the contract segment. With the good trading conditions encountered during the year, it increased both its sales revenue and operating surplus by 13% on the previous year.Wool operations “Sales revenues for the wool operations were $44 million, down 11% on last year. Most of the decrease in sales revenue was attributed to lower wool prices which, on average, were down 11%. Operating surplus (before corporate costs, interest & tax) for the wool businesses was $1.7 million (down 18%).”Microbial Technologies Cavalier wrote off the accumulated development expenditure incurred on its Microbial project last year after concluding that the prospects for successful commercialisation were uncertain.”However, we are continuing to underwrite the project whilst certain avenues for enhancement are explored. We have set benchmarks & timelines as conditions for our continued involvement and we remain cautiously optimistic of a positive outcome.” Outlook Mr Chung said Cavalier’s outlook was more positive than it was a year ago: “At that time, the tighter economic conditions were starting to impact adversely on our retail carpet business and, consequently, on our earnings. It also came on the back of a record earnings performance in the preceding 2003-04 year, which became the benchmark for the 2004-05 year.”The economic conditions for our main business in carpets will still be tight, but we believe the retail business in Australia has neared its bottom and there are some signs there that conditions could slowly improve. But against that would be the recent interest rate rise, which could be a dampener for refurbishment spending.”In the retail business in New Zealand, we believe there will still be some more downside to come. On the other hand, we have confidence that the contract business in both markets will remain busy, which is in line with most of the market commentaries that we have seen. Overall, we are optimistic that the carpet operations will hold their 2006 year’s results.”
Mr Chung said Cavalier had budgeted for a 5% increase in group earnings, but with a number of uncertainties.The company is continuing its policy of paying dividends 3 times/year but has cut the final payment from 14.5c to 10c/share. For the whole year, the dividend is down 9c to 18c/share. Want to comment? Click on The new BD Central Forum or email [email protected].
Attribution: Company statement, story written by Bob Dey for this website.
