The Australia-listed retailer is a household name, but not one investors usually like. However, earnings are steady and valuations are attractive. And its dividend yield is too attractive to ignore.
SINGAPORE (Jan 23): ASX-listed Harvey Norman Holdings (HVN) operates and franchises household goods retail stores across Australia, New Zealand, Singapore, Malaysia and four European countries. HVN has three main business segments: It derives almost two-thirds of its revenue from retail operations, a quarter from franchising operations and the remaining 10% from the retail property segment. Given the company’s main business is in discretionary retail such as furniture and consumer electronics, the company’s earnings are positively correlated to the growth in household income and consumer spending. The risk for HVN, however, is relatively contained given its franchising fee structure which denotes more inelastic income, and is further supported by its robust property portfolio which enables it to control rental costs more flexibly.
For its most recent FY2019, HVN improved its earnings over the previous year and strengthened its balance sheet as well. PBT was up 8.4%, while net assets increased by 8.8% y-oy. Net debt to equity also improved: down from 25.5% to 19.5%. Over the past five years, HVN managed a CAGR of 8.1% and 9.4% for its revenue and earnings respectively. By contrast, its share price gained just 7.9% CAGR in the same period, suggesting potential undervaluation.
In terms of yields, HVN is significantly more attractive than the benchmark Australian risk free rate of 1.3%. Earnings yield, operating cash flow (OCF) yield and free cash flow (FCF) yield are at 6.9%, 7.3% and 4.9% respectively. Its balance sheet quality also checks out well, with a current ratio and quick ratio of 1.6 and 1.1 times respectively, representing good short term liquidity. Solvency ratios are also reassuring with a debt to equity of and interest coverage ratio of 26.6% and 19.3 times respectively. Compared to its regional peers, HVN trades at a 14% and 3% discount for its P/E and EV/ ebitda, making it an attractive stock.
Looking ahead, HVN plans to grow from 90 stores now to 111 by the end of FY2021. Out of the 21 new stores planned, 17 will be in Singapore and Malaysia. The latter’s higher GDP growth rates, higher employment, and larger household sizes, relative to Australia, will be positive for HVN.
Perhaps HVN’s most convincing investment feature is its attractive dividend yield of around 7.5%. Accumulated profits, or better known as retained earnings, have grown at a decent pace over the years; which firstly reflect a stronger balance sheet. More importantly, HVN was able to grow its retained earnings despite the dividend yields being close to 7% over the past 10 years on average (see Chart 1). When a company makes profits, it can either reinvest it, store it as reserves or pay out dividends to shareholders. This implies that HVN has been very much profitable over the years. Further, given that retained earnings make up 75% of the company’s total equity, HVN can more than afford to maintain its strong dividend yields even in difficult years due to its significant reserves.
The company’s five-year price movement is cyclical (see price chart), which denotes multiple buying opportunities to capitalise on the attractive yields. However, HVN appears to be trading on the more expensive side, which analysts have pointed out. The price consensus for HVN from analysts is now A$3.92 ($3.64) against its current trading price of A$4.38. Given that this is a dividend-yield stock, it is more suitable for long-term investors.
Ideally, the strategy would be to buy more as the share price declines and continuously accumulate the shares over the long term while enjoying above average realised returns through strong dividend yields. We view entry at the current price as attractive but anything below A$4.00 is definitely a bargain.
