Australia | Oct 28 2015
-Ireland likely to break even in FY16
-Upside from internal initiatives
-Is Harvey Norman losing Oz market share?
By Eva Brocklehurst
Harvey Norman ((HVN) is experiencing robust sales of household goods on the back of Australia's buoyant housing construction cycle but several brokers warn this heady growth is waning. Some, such as Citi, expect it will ease quite soon while others believe there could be another twelve months from which Harvey Norman could benefit.
The company's September quarter like-for-like sales growth in Australia was above 7.0% and margins expanded to 6.1% from 5.1% in the prior corresponding quarter. Macquarie suspects the latter reflects favourable currency trends and lower tactical support costs. The quarter was strongly positive but largely factored into the broker's expectations. This near-term strength does not deter Macquarie from expecting a tougher medium term outlook and an Underperform rating is maintained.
The outlook for the stock is split between two camps on FNArena's database. There are four Buy ratings and three Sell. The consensus target is $4.34, which suggests 5.0% upside to the last share price. Targets range from $3.75 (Citi) to $4.80 (UBS, Deutsche Bank). The dividend yield on both FY16 and FY17 forecasts is 5.4%.
Macquarie suspects moderation in the housing cycle will mean tailwinds ebb and eventually become headwinds in late FY16 and FY17. This could even accelerate if the 15-20 basis points in mortgage rate hikes from the major banks is not neutralised by any move on official rates from the Reserve Bank.
Morgan Stanley lifts forecasts for FY16 slightly but retains an Underweight rating, also expecting growth will moderate. The lagged impact on retailing from the housing cycle has supported the retailer to date, but as this eases so the broker expects will Harvey Norman's Australian trading. This is because the retailer tends to generate higher margins from furniture and bedding categories, the most exposed categories to housing.
A continuation of the current run rate suggests to UBS that Harvey Norman could beat first half forecasts by 6.0%. The broker is sticking with its forecasts for 21% profit growth in FY16 and 10% in FY17, underpinned by the growth in the Australian franchisee operations and an improvement in FY16 margins, as well as expectations Ireland will break even in FY16. Morgan Stanley also envisages this geography will break even after 12 years of losses.
UBS expects Harvey Norman will still benefit from internal initiatives around labour and centralised ordering and this presents upside for the stock and retains a Buy rating. Deutsche Bank is of a similar view, noting the retailer is a late-cycle play on the housing market and more upside could be forthcoming. Other geographies are growing despite strong comparables and the broker highlights the fact Australian business strength in July and August continued into September, amid signs that high margin product sales are outpacing lower margin ones.
The company's strong presence as a homemaker store should provide continued leverage to not just the housing market cycle but also broader trends in home and lifestyle purchases, while margin expansion should continue from operating cost initiatives, JP Morgan maintains. The broker's Overweight rating is based on these drivers, plus valuation support as the stock has rated back to a more modest price/earnings multiple following its recent underperformance.
Credit Suisse suspects the company can continue to ride the housing cycle for a little longer. While the end of the housing construction boom is likely to be closing in and there is a shorter horizon on which to extrapolate earnings growth, the broker contends that the impact on Harvey Norman will only be mild at this stage. Credit Suisse forecasts the earnings margin plateauing at 5.0% for FY16.
On the more sceptical side sits Citi. The broker suspects there is only a few months more of strength in the housing cycle and the downturn will be reflected closely in furniture and electronics sales. The broker believes the stock should be trading at a discount to the market, not a premium. Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, also has a Sell rating, with a $3.40 target. The broker was unimpressed by the quarterly result, as this was factored in and consistent with the view that the housing cycle is peaking.
Moreover, Goldman points out that, when compared with Australian Bureau of Statistics sales data for July and August in terms of furniture, up 7.8%, and electronics, up 8.8%, Harvey Norman's sales appear to be under the market rate. The broker suspects this points to a loss of share in key markets. Another aspect Goldman highlights is that, despite the strong result, three stores were closed in the quarter and, at 191, the company has its lowest store count in Australia since 2007, having closed stores every year bar 2011.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
