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Cavalier gives shareholders reason for hope; no dividend yet

Friday 22nd February 2019

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Cavalier Corp’s investors might allow themselves to believe the company is turning a corner after it reported a first-half result at the upper end of guidance following a similar performance in the previous financial year.

Nevertheless, the board isn’t ready to resume dividend payments – the last dividend Cavalier paid was 3 cents per share for the six months ended December 2013.

“While no interim dividend has been declared, the company remains committed to the reintroduction of dividends as part of its long-term financial strategy,” was all the carpet maker had to say on the matter.

The net loss of $10 million for the six months ended December 2018 reflected the $12 million loss on the sale of the Cavalier Wool Holdings scouring business. The $1.9 million normalised net profit, up 68 percent on the previous first-half, was at the upper end of the $1.6-2 million guidance.

Cavalier highlighted good sales of its high-end Cavalier Bremworth brand and emphasised its new strategy of concentrating its resources on marketing the brand.

In fact, chief executive Paul Alston says marketing its high-end wool carpet is the company’s core business now, rather than manufacturing per se.

While it didn’t provide a breakdown, it noted the impact on sales of synthetic products of softer market conditions, particularly in Australia.

It reported a 24 percent jump in first-half operating earnings to $3.8 million from the carpets business, despite sales falling 6.8 percent.

The much smaller wool buying business lost $50,000 after reporting a $525,000 profit in the previous first half, although lower wool prices did benefit the carpets business by lowering its costs.

Alston says about 55-60 percent of Cavalier’s carpet sales are still of synthetic carpet, although that has started to shift.

Nearly 70 percent of its sales in Australia are now of woollen carpets, up from close to 60 percent a couple of years ago, he says.

But Kiwis are still wedded to synthetics – 55.5 percent of Cavalier’s sales in the latest six months were in New Zealand.

“We need the New Zealand consumer to see the relevance and value of wool carpets and that they’re so much better than synthetics and to start buying them,” Alston says

To that end, Cavalier is planning a new television advertising campaign in coming months.

The company is also working on establishing a better foothold in global markets – sales outside of Australasia accounted for only 4.3 percent of sales in the past six months. It exhibited at the Domotex flooring show in Germany last month.

It was a very different story when Alston was appointed acting chief executive in May 2015.

The press release announcing his appointment said the company was enduring “a period of the toughest trading conditions ever faced.”

But it had already been a long slow slide for Cavalier from when its share price peaked at $5.70 in December 2003.

Earlier in 2012, the year Alston joined the company as chief financial officer, the shares had traded up near the $4 mark but closed at $1.55 the last trading day before he started.

The shares haven’t traded today after closing at 51 cents yesterday, although they’re well off their low in August 2007 at just 27 cents.

The strategy has clearly changed dramatically. In May 2015, Cavalier was talking about its synthetic carpets being “the foundation stones upon which the future of the company is based.”

Alston says the world has changed since then and environmentally-friendly products are back in vogue, helping to arrest what had been wool’s fading relevance.

He’s now talking about wool in the same way Cavalier used to talk when wool carpets was its focus. Pet smells have six times more chance of sticking to a synthetic carpet than a wool one and “wool will bounce back, synthetic won’t.”

Cavalier might have its business refocused where it ought to be but it will always be dependent on housing market cycles. Australia’s housing market is slumping while New Zealand’s is trending to flat.

Alston says Cavalier can still achieve profit growth in Australia from its high-end niche, despite both consumer and business confidence having slumped there.

“There will be bumps along the road and it’s not going to happen overnight,” he said.

“When it normalises, we’re very well placed.” 

Indeed, the wool holdings sale allowed Cavalier to cut debt to $17.3 million, down 48 percent from a year earlier and down from $61 million in December 2014.


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