Cavalier reports sharply lower first-half net profit

Cavalier Corp posted a sharply lower first-half profit and continues to forecast no earnings growth for the full year, although it expects improvement further down the track.

The company says its net profit for the six months to December was $31,000 versus $3.5 million in the same period a year earlier.

It noted the cost of work to reduce debt, rationalise inventory and restructure had impacted the first half, as had the increased wool price and strong US dollar.

Revenue fell to $84.3 million from $98.4 million in the prior period. It reported a normalised net loss, after adjusting for abnormal gains and transition costs, of $1.9 million versus a normalised gain of $2.4 million in the same period a year ago.

Normalised earnings in the year ending June 30 are expected to be "close to breakeven", it reiterated.

However, while it says the short-term costs of its reinvestment activities are impacting the company they will progressively and significantly benefit the company in the future.

Regarding the carpet business, the company says the New Zealand market has remained reasonably buoyant but Australia has been much softer than anticipated, particularly in the past two months.

Cavalier says it has now closed its Christchurch plant and moved the felting operating to Whanganui. Woollen yarn spinning is now conducted entirely out of the Napier plant.

The significant restructuring costs, higher wool prices, the higher US dollar and increased manufacturing costs “have negatively impacted the six months" in the carpet business and won't have any benefits until 2017-18.

The six-month lag between the purchase of wool and the manufacture and sale of carpet also means there won't be any benefit from a current drop in wool prices until 2017-18. Rather, the high wool price from the previous year is having an adverse impact, the company says.

Within the wool business, its wool buying businesses had been hard hit by a dramatic drop in wool prices, due almost entirely to a lack of demand from China.

It says Elco Direct had to exit stocks in a falling market, which had a negative impact on margins. The current price is low and growers are reluctant to sell, Cavalier says.

"Once demand returns and wool price stabilises, Elco Direct will be in a better position to buy and sell wool at a consistent margin."

The company noted that after two years of court proceedings, the merger of Cavalier Wool Holdings with the wool scouring operations of New Zealand Wool Services International was finally approved in December.

The merger is aimed at safeguarding the wool scouring industry in New Zealand and Cavalier says its reduced share in a much bigger entity will be beneficial for the company in the long term. It holds 27.5% of the enlarged wool scouring business compared to 50% it held in the smaller pre-merger entity.

It says volume through the scour was considerably down in the first six months of the year compared to the same period a year earlier.

While the total wool clip has not changed dramatically, at current low prices growers and exporters are holding off committing to selling and scouring wool.

Cavalier says the consolidation of the scouring business is expected to take a year to complete.

Regarding dividends, it noted that while "good progress" has been made toward an ongoing improvement in underlying performance and getting debt under control "we are not there yet".

Cavalier says the New Zealand-Australian dollar exchange rate and the weakness in the Australian economy remain a concern to the company as an exporter. "As a consequence, no dividend is being paid at this time."

Cavalier shares are recently unchanged at 63c.

(BusinessDesk)