Harvey Norman Hurt By Irish Operations

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This story features HARVEY NORMAN HOLDINGS LIMITED.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Having enjoyed a strong first half of FY08, retailer Harvey Norman ((HVN)) experienced a much weaker June half and following an update yesterday on group performance so far in FY09, it looks like the weakness has continued into the new financial year.

As broker Citi points out, a major issue for the group at present is margins as they are declining across all of its operations in Australia and New Zealand, while the fledgling Ireland business is also having a significant impact on group profitability. Currently the operations are losing in the order of $2.8 million per month, which is a further deterioration from the performance in the six months to the end of June.

As well, the broker expects the company will focus more on maintaining market share than on margins in FY09 given the tougher economic environment, which leads to the broker cutting its FY09 earnings per share (EPS) forecast by 5.3% to 26.4c, while in FY10 it is forecasting EPS of 32.1c.

Macquarie has been more severe with its earnings adjustments and dropped its FY09 forecast by 15.9% to 23.3c, while its FY10 estimate has been lowered by 15.6% to 27.8c. This puts the broker well below market consensus forecasts, which according to the FNArena database stands at 27.3c and 30.8c respectively.

Given its negative view, Macquarie has retained its Underweight rating on the stock, the only broker in the FNArena database to take such a negative stance. Overall, the company scores two Buys, an Accumulate and four Holds as well, with JP Morgan retaining its Overweight rating given the value on offer and Citi suggesting any price weakness related to the earnings downgrade would represent a buying opportunity.

The average price target on the stock according to the database is now $3.75, down from $3.98 prior to the update. This compares to a median price target prior to the downgrade according to Thomson One Analytics of $4.20.

Today, shares in Harvey Norman are down despite the stronger overall market and as at 1.35pm the stock was 10c or 3.2% lower at $2.99. Its trading range over the past year has been $2.91 to $7.25.

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