CAV - Cavalier Corp (Carpets)

[sb9]

Article from NBR weekend....for those don't have access to paid content....(Sorry to clutter up)

What Cavalier has pulled out of its hat is working
Regular readers of this column will be aware Shoeshine has stuck his boot into listed carpet maker Cavalier Corp [NZX: CAV] on occasion.
Most notably it was at the time of Cavalier’s 2014 annual meeting, which one influential shareholder described as one of the worst performances by an under-pressure board in recent memory.
Shoeshine’s criticism wasn’t limited to just his own observations but was also a reflection of the frustration investors felt over the company back then.
The main point was the previous board and management team appeared bereft of ideas needed to dig the company out of the hole they had dug.
The company’s financial position had weakened dramatically, largely due to a combination of rising fibre input costs, a strong New Zealand dollar against the Australian dollar and low greasy wool prices.
But it was also argued that Cavalier was slow to react to these dynamics while its debt levels soared to unsustainable levels.
Although Cavalier did restructure its business, it wasn’t enough to stem the declining earnings, and overheads remained high while competitors had stolen a march on consumer trends toward cheaper synthetic carpet.
Cavalier’s market capitalisation had shrunk from $130 million to just $25 million in less than 12 months.
The November 2014 shareholders meeting was a catalyst for more radical action as it became clear the old guard had passed their use-by date, for want of a better phrase.
Out with the old, in with the new
Deloitte was called in to work on a debt reduction plan and three-year strategy for the business.
Changes at board level and senior management were ushered in.
Out went former chairman Alan James and managing director Colin McKenzie. Long-serving director Graeme Hawkins also retired, ending his 18-year stint on the Cavalier board in March this year.
The new brooms included new chairwoman Sarah Haydon, who had been on the board since August 2012, Steve Bootten, Dianne McAteer and John Rae.
In May 2015 Paul Alston was promoted to chief executive having been chief financial officer since November 2012. A former banker, who started his career with Deloitte in Wellington, Mr Alston has proved to be a good choice to lead Cavalier out of the mire.
But what has also caught Shoeshine’s attention is that the gender balance of Cavalier’s key personnel is starting to tip toward women.
Former KPMG audit partner Sarah Hipkiss is the latest appointment and she will assume the CFO role from September this year.
This follows the appointment of Cathy Howitt as general manager of New Zealand sales.
As previously mentioned, the fresh board now has two female directors, including Haydon.
Perhaps this tilt reflects Cavalier’s consumer products being carpet and flooring materials, which are more likely to be chosen by women but the composition certainly reflects a more modern approach to governance.
The board now comprises of four independent directors, with a tenure of between eight months and four years, and one non-independent director.
Showing results
The results are starting to show on the back of some bold moves and the company’s shares have gained 60% over the past six months.
News this week that Cavalier will consolidate manufacturing operations to Napier and Whanganui and close its Christchurch plant has attracted some negative headlines given the loss of 65 jobs.
But it’s part of a much wider restructuring process that has been needed for some time.
The trick for Cavalier will be to minimise the one-time costs of this and any further plant closures.
The company expects costs of between $4-4.5 million in the 2015/16 financial year for employment payments, and the relocation of equipment.
On the upside, Mr Alston says “significant” benefits will flow through in the 2016/17 and 2017/18 years, with a payback from the restructuring of its yarn spinning operation expected in slightly over one year.
Cavalier’s previous earnings outlook had suggested a profit of $4.5-5 million in the year to June 30, ahead of last year’s normalised earnings of $1.1 million.
The company is targeting a return to “acceptable levels of profitability” in the 2017 financial year.
Earlier this week Cavalier was asked by NZX to explain a jump in share price from 59c to 75c.
The only thing it could point to was a report published by Vulcan Capital on April 7, which carried a buy recommendation on the shares at 57c.
Not to be confused with Paul Allen’s investment firm, Vulcan Capital is a boutique Auckland-based firm founded by Brett Wilkinson and Sam MacDonald.
Its report on Cavalier goes over the company’s restructuring, including the exit of the loss-making Ontera business, the sale of Cavalier’s Sydney warehouse and moves to reduce inventory and shave overhead costs to match competitors such as Godfrey Hirst.
It notes that Cavalier has reduced debt over the past 12 months by $26 million and will benefit from low interest rates given that its overall debt to the BNZ is more acceptable.
Vulcan also highlights the trend toward synthetic carpets and that Cavalier is inching its product mix higher in this regard.
“It would be fair to say that Cavalier was late to the market with the synthetic range of carpets. However, to a large extent, the ‘Cavalier’ brand name has enabled them to claw back market share.
“At the same time, low volume margin lines are being deleted from the range. This simplification process is seen as assisting in driving productivity gains.”
Vulcan says that as long as the New Zealand dollar stays in the 88c-90c range against the Australian dollar, Cavalier should build profits to $7 million, or 10c per share, for 2017.
Shoeshine reckons there is still some difficulties in forecasting Cavalier’s profit expectations, given the costs associated with its restructuring and the cyclical nature of the business.
But the steps taken by the new board and management has the company moving in the right direction at last.
Shoeshine’s last column on Cavalier said the company needed to pull a rabbit out of its hat to pull itself out of a dire situation.
It’s still early days in a long battle but what Cavalier has done is certainly working.

[bull....]

bank guy running the show that's why this time could be different in the turn around, reduce debt and inventories rid of the dead wood, improve relevant product lines improve margins etc etc

[sb9]

I think the horse getting unbolted for another run-up.

[bull....]

I think the horse getting unbolted for another run-up.

looks like 66c held as support as hoop mentioned this figure, take out of 75c previous high other week would be pretty bullish

[sb9]

looks like 66c held as support as hoop mentioned this figure, take out of 75c previous high other week would be pretty bullish

Sure thing, 75c seem to be the resistance once that's broken it'll race to the 80s...

[sb9]

Nothing much happening here eh, just like sp not going anywhere. Need some news to kick into action.

[vin]

Was thinking this today, I've put too much of my finances into the share market, need to make a culling! Something needs to move...

[Jinx]

Was thinking this today, I've put too much of my finances into the share market, need to make a culling! Something needs to move...

You'd be a very silly to move CAV before later this month they release something similar to last years CAV: Earnings outlook and related matters (http://www.stocknessmonster.com/news-item?S=CAV&E=NZSE&N=264561) CAV is boring, agreed. But by the end of the month well be at minimum 80c I'd guess.

[vin]

Cheers for the heads up, will sit tight.

[sb9]

You'd be a very silly to move CAV before later this month they release something similar to last years CAV: Earnings outlook and related matters (http://www.stocknessmonster.com/news-item?S=CAV&E=NZSE&N=264561) CAV is boring, agreed. But by the end of the month well be at minimum 80c I'd guess.

Agree 100%, expecting some sort of earnings outlook news some time this month.