Richard Inder: Good grilling needed at Feltex

Who are the fools?

Feltex Carpets chief executive Sam Magill and chairman Tim Saunders are walking a tightrope.

The carpet-maker's April 1 profit warning, which amounted to a cut of as much as 70 per cent on second-half earnings, must raise questions over their continued leadership of the company.

Scepticism over the company's prospects was rife even before it floated last June.

The $1.70 float price was at the bottom of the indicative range. And, then on the day of listing, Macquarie Equities, a member of the float syndicate, dumped almost 4 million shares at 10c below the issue price. The broker had taken a bigger allocation of shares than it could sell to its clients.

That should have been warning enough to Magill and Saunders. They should have recognised even then that if they were to retain the already fragile confidence in the company, they would have to treat investors with kid gloves.

Rough is probably a better description of their actions.

In the group's review of its prospects for the quarter ending September, Feltex just hinted at the problems ahead. It highlighted a surge in raw material costs, but promised to the "maximum extent possible" to recover these cost increases. In its half year to December report, released to the stock exchange at the end of February, Feltex warned of challenges in the high-volume segments of the Australian residential market and the rise of the kiwi dollar. But, it added, its premium brands would provide some insulation.

Profits for the period had risen from $11.4 million to $12.2 million.

Despite the difficulties Feltex said: " ... Net profit projections for the full year remain achievable."

A month and a bit later - on April Fool's Day no less - a multitude of hurdles emerged as it slashed its profit forecast for the full year from $23.9 million to between $15 million and $16 million.

As half of the year had already passed by this stage, the company was effectively cutting its forecast for the second half from $11.8 million between $2.8 million and $3.8 million.

Retailers had warned of continued low store traffic. The market was suffering from a shortage of carpet layers, demand had softened and the strong Aussie dollar against global currencies had boosted competition, particularly from imports. Meanwhile, raw material costs and the strength of the kiwi against the Aussie were also hurting.

It is hard to see why Magill and Saunders could not have predicted the effect of these factors when Feltex produced its half-year earnings in February.

More to the point, why they could not have detected them earlier than this.

The magnitude of the profit warning suggests a dramatic turn in the market. The changes the company highlighted are at best incremental.

Listed companies should strive to exceed public forecasts by a moderate margin - small surprises on the upside are welcome.

It is an art that Fletcher Building chief executive Ralph Waters has mastered.

This despite parts of his company being exposed to many of the forces that afflict Feltex.

Professional investors and analysts, who own the bulk of company shares, feel shortchanged. They need to trust company pronouncements if their research is to have any weight.

Feltex has promised to release third-quarter results to March 31 early - next week - and give additional commentary on the earnings guidance.

Magill and Saunders will rightly face tough questions.

Testing the limit

San Miguel's new offer for Australia's National Foods, outbidding Fonterra, must be pushing the New Zealand dairy giant to the limit.

The market is expecting Fonterra to make another bid of about A$6.50. This is at the top end of the A$6.01 to A$6.55 range National Foods management have placed on their own company. They possess an intimate knowledge of the company's prospects, but they are still more likely to be more optimistic than outsiders.

Meanwhile, National Foods management have left no doubt in the minds of observers about who they would like to win the takeover bid. Recommending the new San Miguel bid, they agreed to another break fee if Fonterra comes forward with an acceptable offer.

The fee of about A$1.5 million comes on top of the A$17.8 million National Foods paid to San Miguel in early March, when its management recommended Fonterra's most recent A$6.20 a share offer. Despite this recommendation, this fee has been conspicuously absent.