Good result in difficult market for Cavalier Corporation
Elco Direct has successful year
Cavalier Corporation owns 100% of Elco Direct and its financial year ended on 30 June 2011. Below is a summary of the Corporation's annual result and Elco Direct's performance.
Elco Direct had a very successful year with EBIT of $1.6 million, which is up 49% on the previous year.
Sales for the year of $40 million were up 41% on the previous year, with increased wool prices more than compensating for the slightly lower volumes of wool transacted during the year. Elco Direct has built up a network of loyal farmers through excellent service and providing the very valuable and strategic alternative to the wool auction system over many years.
Elco Direct has also played a significant and active role in securing wool for the Group's broadloom carpet operations at a time when these operations were having difficulty sourcing wool from their traditional suppliers. The consequence of this is, unfortunately, the impact it had on the Group's cash flows and working capital position. However, we expect to return to the wool exporters for much of our requirements, once wool prices settle and the market returns to normality.
Cavalier Corporation Financial Performance 2010/11 year
The following is a brief summation of the financial performance for the 2010/11 year
- Revenue of $229m, up 4% on the previous year
- 57% of this revenue came from Australia, compared to 53% the previous year
- Profit after tax (normalised) of $17.2m, up 4% on the previous year
- Earnings per share (normalised) of 25.4 cents, up 3% on the previous year.
- An increase in assets of $25 million, mainly due to increase in wool prices and inventory required to maintain market supply in the tile business.
Wool prices increased by 80% over the year with the magnitude and pace of the increase unprecedented.
This increase can be attributed to a world-wide shortage of cross-bred wools and the replenishing of stock levels - which had been allowed to run down during the GFC - by carpet mills around the world.
The wool price increase resulted in a 10 to 20% lift in the prices of our woollen carpets, and while the market is slowly coming to terms with these increases, we are ever mindful of the risks posed by the now comparatively much cheaper synthetic alternatives, particularly at the value end of the market. Only time will tell whether wool prices - which are currently at their 20 year highs - will remain at these levels over the longer term, but our view is that they are not sustainable and will ease back in time.
Our wool business comprises the Elco Direct wool acquisition operation and our 50% interest in commission woolscourer, Cavalier Wool Holdings (CWH).
Looking forward to the new financial year, we do not see any immediate upside to the market conditions in New Zealand for carpets. For that to improve, we will need to see a lift in real estate turnover which is generally a good barometer for refurbishment work as well as new home starts. On a positive note, we can see some upside towards the latter part of the 2011/12 year from the Christchurch rebuild providing construction work there gets underway soon.
As for Australia, we have enjoyed the relatively better market conditions there. However, market conditions slowed markedly towards the end of the 2010/11 year due to the impact of high interest rates on real estate turnover and new housing developments, and this is expected to continue for the time being. That said, there is still a general shortage of housing in the main cities in Australia and this should help to underpin the residential segment of the market.
With the current high wool prices, there is every encouragement for farmers to lift wool production by changing farm practices and, in time, lifting stock numbers. Any additional wool volume gained here would obviously have flow-on benefits for our scours.
In light of the difficult and unpredictable trading conditions, it is too early in the year to provide a meaningful earnings outlook to shareholders. We should be in a better position to do this at our annual shareholders meeting in November 2011.