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Cavalier sinks into the red as restructuring costs mount, wool prices slump

Wednesday 23rd August 2017

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Cavalier Corp sank back into the red after the overhaul of the wool carpet maker's operations proved more expensive and more prolonged than expected, raising flags over the company's ability to keep operating as a going concern. 

The Auckland-based company posted a loss of $2.1 million, or 3.1 cents per share, in the 12 months ended June 30, turning around a profit of $3.1 million, or 4.5 cents a year earlier. The bottom line was weighed down by a 40 percent jump in restructuring costs to $6.3 million as Cavalier shut down factories and laid off staff to consolidate its operations. That rationalisation limited Cavalier's product range and meant it could meet customer demand, primarily in Australia. 

"While the decision to consolidate was necessary, it proved to be more costly than estimated and the move too long to implement," chief executive Paul Alston said in his report. "Redundancy and plant relocation expenses were in line with expectations, but the inefficiencies and disruption inherent in a major rationalisation took longer to be eliminated, affecting sales and giving rise to the one-off item reported." 

Stripping out one-time items such as the restructuring costs, Cavalier's underlying earnings dropped to $1.9 million from $6.3 million and largely in line with the already downgraded guidance. Normalised earnings before interest, tax depreciation and amortisation shrank to $2.6 million from $12.3 million a year earlier, less than Cavalier's $2.9 million of finance costs in the year. 

Cavalier renegotiated its banking facility with Bank of New Zealand and National Australia Bank to "better reflect" operating conditions, and let the company avoid a breach of lending covenants. Bank debt totalled $41.5 million as at June 30, up from $37.7 million a year earlier, and the new funding arrangement will see a staged reduction from February next year. 

Even so, the net loss and an operating cash outflow of $5.4 million in the year saw the board note its ability to meet those banking covenants relied on meeting profit forecasts, something auditor KPMG tagged as a "material uncertainty" its report. 

"There is a material uncertainty concerning the group's ability to achieve financial forecasts and generate sufficient cash flows from operations to ensure the group will be able to comply with its financial covenants and debt repayment obligations over the term of the facility agreement," KPMG's audit report said. 

That comes as Cavalier grapples with a dim outlook for wool products, where prices have slumped in the absence of Chinese demand, and the company's revenue dropped 18 percent to $156.1 million and gross margins shrinking to 19.2 percent from 21.2 percent a year earlier. 

"While the recent and sudden plunge in the wool price had a negative impact on Cavalier this year, with reduced volumes through our wool buying and scouring businesses, the drop in wool price will have a positive impact in our core business of manufacturing and selling woollen carpets," Alston said. 

The company plans to keep capital expenditure to a minimum over the next 12 months, with a focus on cutting debt.

"The prospect of dividends is one which the board regularly review, however, given the FY17 performance, Cavalier is not in a position to pay a dividend," Alston said. 

The shares were unchanged at 30.5 cents, having plunged 61 percent this year, making it the third worst performer on the S&P/NZX All Index so far this year, and valuing the business at $20.9 million. Cavalier's net tangible assets are valued at 95 cents per share. 


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