Daily ShareChat: Cavalier

By Jenny Ruth

Sunday 15th August 2010

Carpet maker Cavalier is trading at a substantial discount to its peers and to his $3.32 discounted cashflow valuation, says Dennis Lee, an analyst at Craigs Investment Partners.

While there is downside risk to earnings because leading indicators are tapering off, such as low volumes of houses selling, net immigration falling and mortgage interest rates rising, this is probably already factored into Cavalier's share price, Lee says.

The residential market contributes about 60% of Cavalier's broadloom carpet earnings. "While we are not forecasting a 'double-dip,' we are now expecting a more modest recovery," Lee says.

The stock has fallen considerably since late March and hasn't lifted much since mid-July when management upgraded its earnings guidance for the year ended June by between 19% and 22%. Lee says the upgrade came as a surprise. Although no details were disclosed, "we think this was due to greater-than-expected monetary gains from its restructured woolscouring operation on the back of a recovering global wool market," he says.

"Cavalier is a well-managed company with a quality franchise and a strong market position," he says. "At the operating level, we believe the business is in relatively good shape. Aggressive cost-out initiatives taken in the last 18 months have provided the company with a competitive cost base to benefit from an economic recovery."

Recommendation: Buy

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