Caution Required For Harvey Norman

This story features HARVEY NORMAN HOLDINGS LIMITED. For more info SHARE ANALYSIS: HVN

Bottom Line 05/06/17

DailyTrend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $3.55 / $3.21 / $2.84
Resistance Levels: $4.40 – $4.56 / $4.80

Technical Discussion

Harvey Norman Holdings ((HVN)) is involved in the provision of integrated retail, franchise, property and digital systems. The Company's operations include franchising, including sale of furniture, bedding, computers, communications and consumer electrical products in New Zealand, Slovenia, Croatia, Ireland and Northern Ireland. The franchising operations section includes franchisees in Australia. The Company's franchisees offer products including white goods, small appliances and cooking. The property section includes retail property and property developments for resale. For the year ending the 30th of June 2017 revenues increased 3% to A$3B. Net income increased 29% to A$449M. Revenues highlight the total revenue received from franchisees which increased 4% to A$1.07B and the Sales revenue increase of 2% to A$1.83B. Net income benefited from Net property revaluation increment on Au increase from A$47.8M to A$107.4M. Broker consensus is currently “Hold”. The dividend yield is 6.5%.
 
Reasons to be cautious:
→ The cut to the dividend not taken well by investors.
→ A marked slowdown in sales momentum and poor underlying cash flow.
→ The expected share buy-back hasn’t materialised.
→ Competitive pressure remains an issue.
→ A recent survey shows Amazon is around 15% cheaper than Australian retailers.
→ Potential for the housing cycle to slow down.
→ More evidence suggesting a cyclical high is close.
→ Cost cutting may have run its course, which has been the driving force for earnings.

Price had come within a whisker of tagging the typical retracement zone during our last review before reversing lower. In fact, results had just been announced which the market didn’t take well to. Although significantly lower levels haven’t been witnessed over the past few weeks price has continued South. Looking at the larger patterns shows there is room for the current leg lower to continue, albeit likely following a bounce. Zooming into the more recent price action shows that from the high of wave-B a smaller degree 5-wave movement appears to be unfolding with the final leg down at this degree of trend looking to complete over the next week or so. However, this is unlikely to complete the whole corrective pattern down into wave-C.

A bounce is on the cards over the coming weeks although this should only be the precursor to the next bout of weakness. Looking at the weekly chart (not shown) allows for a continuation down toward the 61.8% retracement level of the whole leg higher off the 2012 lows. This provides a target at $3.20. The problem is that it’s likely going to take several weeks and maybe even a couple of months before that aforementioned target is met. It would take a push above the prior pivot high at $4.53 to move to a neutral stance although a continuation above $4.80 before thinking in terms of avoiding the deeper retracement. Neither is looking likely at this stage. Like many stocks we cover, volume has started to pick up during the recent retracement which is reason for scepticism. Any subsequent bounce, especially if coupled with low-volume would portend further weakness. Plenty of caution is required here over the short-term.

Trading Strategy

With wave-iii being extended we’d expect the first and final legs lower to be equal in length meaning wave-v is nearing the wave equality projection at $3.71. Buyers stepping in over next few days at those slightly lower levels would portend a bounce which should retrace between 50% – 61.8% of the whole leg down from the high of wave-B. I wouldn’t be looking to trade the bounce as it’s unlikely that momentum is going to be strong. In fact, a lacklustre bounce over the next three or four weeks would present a shorting opportunity if you are that way inclined. Either way, we’ll stand aside.
 

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