Investors shun carpet makers' positive spin

By Duncan Bridgeman

Friday 27th August 2004

Making carpets may not be the world's sexiest business but it has paid off handsomely for the two listed companies in this sector.

Cavalier Corporation and Feltex Carpets have turned in impressive results for the 2004 year, exceeding both analyst and company guidance.

However, investors appear to have expected better, judging by the share prices, which both lost ground following the result.

In the case of Feltex, net profit of $11.2 million was double last year's effort and ahead of prospectus forecasts issued three months ago.

The disappointing aspect according to analysts was the sales line, which fell $7.7 million short of forecast.

While the higher New Zealand dollar was partly to blame, volume was noticeably down during April and May, providing some uncertainty as to the underlying momentum of the business.

"What looks like a good result can be a bad result to people who were thinking it was going to be even better," Macquarie analyst Steve Hodgson said.

But with earnings before interest, tax, depreciation and amortisation (ebitda) up 48.1% to $46.2 million over the period, the company was still on target to meet its 2005 prospectus forecasts.

Cavalier also produced a bumper result with net profit up 15% to $21 million.

Goldman Sachs JB Were said the company once again produced a result that surprised on the upside, highlighting the ongoing strength of the core carpet operation.

Yet the shares also lost ground following the result. Given the figures, this probably was more due to an overall weaker sharemarket than fundamentals.

Carpet manufacturing ebit rose 14.2% to $32.2 million, with buoyant real estate activity on both sides of the Tasman the key driver.

The only blemish was the company's wool operations sales, which fell 2.7% to $43.1 million. This was due to lower wool prices, which Cavalier managing director Wayne Chung said in no way indicated reduced operating capacity.

Signs of a slowdown in the construction sector could have an impact next year, but as JB Were noted, this is expected to be offset by increased renovation activity.

For both companies much depends on the actions of the Reserve Bank over the next few months.

A downturn in building activity and consumer spending has been predicted on both sides of the Tasman, although the evidence here is less convincing.

But as Chung said: The extent to which the slowdown might affect the businesses will depend largely on whether the respective reserve banks can engineer a "soft landing" as against a more radical slowdown.

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