Carpet tiles help to insulate against downturn

Carpet group Cavalier yesterday predicted a bottoming-out in its Australian business and a modest rise in this year's earnings.

However, it warned the New Zealand market would remain difficult and disclosed a slump in underlying profits from $19.52 million to $14.65 million as weak carpet sales in both markets weighed heavily on the industry.

"We have budgeted for a 5 per cent increase in group earnings in the June 06-07 year but there are, of course, many uncertainties," Cavalier said.

"The economic conditions for our main business in carpets will still be tight, but we believe the retail business in Australia has neared its bottom and there is some signs that conditions could improve slowly. In the retail business in New Zealand, we believe there is some more downside to come."

Cavalier generates just over four-fifths of its earnings in New Zealand and the remainder in Australia. During the past 18 months, both countries have suffered a sharp slowdown in the housing markets, the main source of carpet demand.

Cavalier's shares yesterday fell 6c to $3.44, which was still well up on its year low of $2.60 in February.

Cavalier's carpet operation bore the brunt of the slowdown. Operating profits were down 16 per cent to $27.3 million, but the division was insulated from the downturn by a good performance by its carpet tile business, which sells to business markets.

Its wool procurement and scouring operation was hit by lower wool prices and unrecoverable cost increases. Underlying profits fell 18 per cent to $1.7 million.

Bottom line net profits rose from $14.1 million to $14.4 million. However, the result was flattered by a near $6 million write-off last year on its Microbial biopesticide business. Cavalier has decided to write off all development expenditure on the project after concluding that commercialisation of the technology was "uncertain".