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Harvey Norman Basks In A Sunny Retail Corner

Australia | Sep 22 2020

This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: HVN

Retailer Harvey Norman is enjoying the proceeds of an extended change in consumer behaviour as Australians snap up household goods.

-Significant profit growth over July to September
-Sales do not appear to be driven by excessive discounting
-Strong balance sheet, scope for capital management

 

By Eva Brocklehurst

Australian consumers are engaging in an extended period of retail therapy, particularly in household goods, and Harvey Norman ((HVN)) is enjoying the proceeds.

The company reported significant growth in pre-tax profit from July 1 to September 17 of 186%. Like-for-like sales in the first half over the year to date are up 34.5%, although this implies a slowdown in September relative to July and August because of the lockdowns in Victoria.

Harvey Norman has flagged an adverse impact from 18 franchise complexes being closed because of stage 4 restrictions in Melbourne. Nevertheless, brokers are reassessing estimates and upgrading expectations for FY21, believing support for the retail sector in this way will be stronger for longer.

Comparable sales growth in all regions, except Singapore and Malaysia, was up in double digits over the three weeks ending September 17. Credit Suisse calculates for the period August 25 to September 17 Australian franchisee comparable sales increased around 25%, which includes the closure of the Melbourne stores.

Macquarie highlights the shift in expenditure to goods from travel and services during the current pandemic in Australia, and consumer durables are topping the category. Consumer durables expenditure is likely to remain elevated despite an expected tapering of fiscal stimulus from October.

Demand for renovation materials is strong and with international travel restrictions unlikely to ease in the short term the broker observes both are contributing to a strong outlook for homemaker sales.

Also, sales do not appear to have been driven by excessive discounting. Instead, demand is stronger. Macquarie upgrades forecasts for FY21 by 25% and FY22-23 by 9%. Still, the broker is cautious about capitalising current sales into perpetuity.

Ord Minnett highlights Harvey Norman has had significant operating leverage and the dramatic profit increase indicates an even greater rate of leverage at the commencement of the first half.

Monthly pre-tax profit is often not quantified, the broker adds, but when provided indicates the relative importance across the financial year. Ord Minnett calculates July and August will comprise 41% of pre-tax profit for the first half as while growth will remain strong it will also moderate.

How Long Will It Last?

Credit Suisse assesses the market is taking an overly short-term look at the pulling forward of expenditure, when changes to consumer behaviour tend to be more persistent when circumstances diverge significantly.

Rather than just focusing on one quarter, the broker believes current spending patterns should be assessed as part of a multi-year reallocation of expenditure and FY21 is likely to account for a significantly higher-than-usual proportion allocated to household goods. Still, spending patterns will revert to longer term norms eventually and Credit Suisse assumes this will occur in FY22.

Goldman Sachs does not expect margin expansion to be sustained beyond the immediate high-growth period. The broker also ratchets FY21 sales forecast down by -0.3% as positive revisions for Australia and international ex Asia are offset by negative revisions for Asian sales growth.

Moreover, higher margin forecasts for Australasia in the first half are expected to be unwound over the corresponding half in FY22. Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $5 target.

Undemanding Valuation

UBS points out the valuation for Harvey Norman is undemanding and the balance sheet is strong, and there is scope for capital management. The broker upgrades estimates across the board, including international, and envisages further upside to FY21.

UBS cites several reasons for maintaining a Buy rating including a neutral consumer outlook, allowing for macro risks such as an easing of stimulus measures and rising unemployment offset by a fall in international travel expenditure and a build up in household deposits.

Furthermore, Harvey Norman is one of the few discretionary retailers that has not experienced a two-year forward price/earnings re-rating, the broker notes, and its PE is at the highest discount to competitor JB Hi-Fi ((JBH)) in over 14 years.

The database has five Buy ratings and one Hold (Morgan Stanley). The consensus target is $4.94, suggesting 10.6% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 6.2% and 5.5%, respectively.

See also, Will Harvey Norman's Profit Growth Endure? on June 24, 2020.

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