Harvey Norman –18.8%
SINGAPORE (June 26): ASX-listed Harvey Norman Holdings (HVN) operates and franchises household goods retail stores across Australasia (Australia and New Zealand), Europe (Ireland, Northern Ireland, Slovenia and Croatia), and Southeast Asia (Singapore and Malaysia). To recap, HVN’s main business is in discretionary retail such as furniture and consumer electronics, and is supported by its franchising operations and robust property portfolio. HVN was the worst performer among our pick of 10 stocks, recording an 18.8% loss in the 6 months, but only slightly underperformed the other two benchmark indices, the MSCI Australia and ASX 200 which lost 17.0% and 14.7% respectively.
Unsurprisingly, Covid-19 was a big hit on HVN. In the latest retail trading update in June, HVN remains uncertain about the prospects. All of HVN’s stores across the globe were subject to lockdown measures from government decrees, as shops were forced to close stores temporarily. Business wise, HVN experienced a drop in year-to-date sales across all countries except Ireland compared to the same period the previous year. Northern Ireland and Singapore were the mostly badly hit, with aggregated company sales declining 43.2% and 26.1% respectively during this period.
Almost all Australian franchisee stores continue to trade, and all franchisee online services in Australia, as click & collect and deliveries were available. Globally, as sentiments of the pandemic began to slowly recover, online trading were also continued. Australia in particular saw a 17.5% growth in franchising operations as all but two stores were operational throughout Covid-19. This was mostly attributed to panic buying, but it must be noted that this spike in sales are one-time unexpected or purchases brought forward, rather than a sustainable and organic increase in sales.
To weather the fallout from the pandemic, HVN on April 2 cancelled its interim dividend of 12 cents per share for its 1HFY2020 ended December 31, 2019, which resulted in A$149.5 million in cash being retained. However, on June 10, it announced a special dividend of 6 cents per share to replace the previously cancelled interim dividend. Additionally, the board and senior management have also opted to take a 20% cut in salaries and fees for the financial quarter, which shows alignment of interests with shareholders.
HVN reported a 1.9% increase and 4.1% decline in revenue and net profits for 1HFY2020 compared to 1HFY2019. During the same period, the net debt to equity ratio improved from 22.4% to 16.6%. Liquidity wise, HVN also has a good current ratio of 1.6 times. The company’s free cash flow yield is attractive at 8.8%, while the expected dividend assuming the final dividends are cut in half (similar to the interim dividends) would still be lucrative at 4.8%. HVN currently trades at a discount for its PE, EV/Ebitda and P/B, at 14%, 15% and 35% respectively compared its global peer average.
Analysts have given a 12 month-price target of A$4.07, well above its current trading price of A$3.51. HVN has six “buy” calls, five “hold” calls and no “sell” calls. We think that the retail sentiment is still quite uncertain over the next three to six months, but with a relatively decent dividend yield and the growing usage of online means for retail purchases, HVN will grow in value over the long term. We think that anything below A$3.50 is a good entry point for the stock.
