Richard Inder: Ailing company in need of blood transfusion

Sam Magill's tenure at the helm of Feltex was shaky after the carpet company's April Fool's Day profit warning. But the latest earnings downgrade made his position untenable.

Even if one sets aside Magill's comment to the Business Herald in the middle of May that he was confident the market would come back, the extent of the downgrades is too great. What is more of a surprise is that he will continue with full executive powers until December and play a major part in the review of operations designed to put the company back on track.

It is no wonder Feltex's shares plummeted 23c to 47c. Asking the executive that presided over the troubles to fix the very same problems is no way to rebuild confidence. This and the latest warning shifts the spotlight away from Magill to chairman Tim Saunders and the rest of the board.

They do not stand up well to the light. In the autumn, the company warned that profits for the second half would be as much as 70 per cent less than it had forecast in the prospectus for its float. The downgrade came only a month after it insisted the prospectus projections were "achievable".

Feltex blamed the sharp turnaround in its fortunes on the waning Australian market, although most observers could not square the extent of the downgrade with these factors alone.

This time, Feltex blamed Australia once again and a softening in the New Zealand market. But investors retaining any faith in the Feltex board would have expected the forecasts to be rock solid. They would have assumed it would have insisted on conservative forecasts for Australia and taken into account the long-apparent New Zealand slowdown.

Financial markets can weather one downgrade, but two is hard to stomach. It will be some time before investors can take the board at face value again.

To his credit, Saunders recognised the gravity of the situation and admitted that he may not be the appropriate person to lead the company in the future.

When it floated, Feltex had a market value of more than $250 million and, for a moment, appeared to provide the NZX with some of the depth it sorely needed.

Yesterday, its market value was just over $70 million and radical surgery is in the offing. The yarn operations in Australia and the woven carpet operations in Christchurch are the most likely to face cuts. A takeover of the company, as Saunders admits, is more than a possibility.