CAV - Cavalier Corp (Carpets)

[winner69]

A fair proportion of the improved cash flow came from working capital (less stock, debtors etc)

If nothing else a sign that management are sort of managing these days, rather than hoping as in the past.

Still need to drive more profits though....but getting there

[winner69]

I really can't figure how CAV can have an NTA of .97 and a turnover of $148m and still be valued at only $41m. Still suffering from historical mis-management?
Still, not too unhappy given I jumped in at 30c - primarily as I thought it might be a takeover target.

Even though a better year CAV return on invested capital (equity + debt) was only 5.5%. Their cost of capital is about 8%/9% so still a value destroyer

Companies that don’t cover their cost of capital don’t deserve to trade at book value or above until they can demonstrate they can consistently add economic value (ie earn more than cost of capital)


With a book value of $1.04 maybe current share price is a bit harsh but as others have said their recent performance has been abysmal

To achieve a positive return on their cost of they need to get npat up to about $7.5m. In light of non existent / low growth in sales most of that extra profit looks like it has to come from continued efficiencies and productivity.

At least heading in the right direction ...might get there one day?

As an aside Hirsts are still beating CAV in the specifier/architectural market.

[sb9]

Even though a better year CAV return on invested capital (equity + debt) was only 5.5%. Their cost of capital is about 8%/9% so still a value destroyer

Companies that don’t cover their cost of capital don’t deserve to trade at book value or above until they can demonstrate they can consistently add economic value (ie earn more than cost of capital)


With a book value of $1.04 maybe current share price is a bit harsh but as others have said their recent performance has been abysmal

To achieve a positive return on their cost of they need to get npat up to about $7.5m. In light of non existent / low growth in sales most of that extra profit looks like it has to come from continued efficiencies and productivity.

At least heading in the right direction ...might get there one day?

As an aside Hirsts are still beating CAV in the specifier/architectural market.

Its all good, however it does deserve bit of premium for a turnaround story and they (board and management) seem to be working very hard and heading in right direction.

[winner69]

Its all good, however it does deserve bit of premium for a turnaround story and they (board and management) seem to be working very hard and heading in right direction.

A premium on what?


Current PE of about 10 which seems about right for a manufacturer in a cyclical market which mentions softening market conditions several times


But no doubt the market will get ahead of itself and we will see 70 cents soon

[sb9]

A premium on what?


Current PE of about 10 which seems about right for a manufacturer in a cyclical market which mentions softening market conditions several times


But no doubt the market will get ahead of itself and we will see 70 cents soon

May be it deserves marginally better P/E, 11 perhaps?

[winner69]

Market not all that rapt in the report

Tomorrow’s another day ....market might take a day or two get over the shock of a profit

Bit of a worry the number of times they mentioned softening market conditions here and in NZ

[Scrunch]

My thoughts,
Fantastic that profitability guidance has been hit (and at the top end)
Marginal that there was no dividend - confirms they are still in recovery mode and that bankers are still powerful behind the scenes. Still deserving a modest PE
Negative - the interest rate on bank debt rose 130 points in a flat interest rate environment
Negative - the record low bank balance may be a bit artificial. Note 4c has an interest rate of 7.3% and $2,798 of interest at 7.3% requires an average balance of $38m. Opening $41.5m, half yr $34.1m, closing $31.5m. This mix of balances doesn't average to $38m. If any of this interest was at last year's noted 6% then the average balance was even higher.
Positive - The half year EBITDA increased again from $4.4m to $5.7m. If $5.7m's continue for 2018/19 in both half's another good increase will happen next year.
Negative - $148m of FY revenue meant 2nd half didn't grow on the 1st half.
Great - If bank balances in 2018/19 are say $10m lower than in 2017/19 then there's a $730k lower interest cost for 2018/19 ($525k after tax). That's 13% net profit growth, even if underlying EBITDA doesn't grow.
Negative - Cavalier's medium term recent history
Positive - The bean counters considered the gap between NTA and share price and discounted cashflow modelling came in above not below NTA

This is a low-coverage stock so I'd expect the market to slowly digest the result and start to move upwards but this may not happen to the AGM and some forward profitability guidance

Disc holding and considering buying more

[sb9]

My thoughts,
Fantastic that profitability guidance has been hit (and at the top end)
Marginal that there was no dividend - confirms they are still in recovery mode and that bankers are still powerful behind the scenes. Still deserving a modest PE
Negative - the interest rate on bank debt rose 130 points in a flat interest rate environment
Negative - the record low bank balance may be a bit artificial. Note 4c has an interest rate of 7.3% and $2,798 of interest at 7.3% requires an average balance of $38m. Opening $41.5m, half yr $34.1m, closing $31.5m. This mix of balances doesn't average to $38m. If any of this interest was at last year's noted 6% then the average balance was even higher.
Positive - The half year EBITDA increased again from $4.4m to $5.7m. If $5.7m's continue for 2018/19 in both half's another good increase will happen next year.
Negative - $148m of FY revenue meant 2nd half didn't grow on the 1st half.
Great - If bank balances in 2018/19 are say $10m lower than in 2017/19 then there's a $730k lower interest cost for 2018/19 ($525k after tax). That's 13% net profit growth, even if underlying EBITDA doesn't grow.
Negative - Cavalier's medium term recent history
Positive - The bean counters considered the gap between NTA and share price and discounted cashflow modelling came in above not below NTA

This is a low-coverage stock so I'd expect the market to slowly digest the result and start to move upwards but this may not happen to the AGM and some forward profitability guidance

Disc holding and considering buying more

Good analysis and well thought out points, thanks for sharing.

[sb9]

https://www.nzx.com/announcements/324478

70c on the cards soon?

[winner69]

https://www.nzx.com/announcements/324478

70c on the cards soon?

Seems to be going in opposite direction

Announcement not taken well