Harvey Norman's Strong Growth Continues but Forecast to Moderate

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Equity Bottom-Up

Harvey Norman Holdings / Equity Bottom-Up

No-moat Harvey Norman reported underlying earnings of AUD 371 million in fiscal 2016, up 38% from the previous year. We adjust this figure by after tax property revaluations of AUD 19 million in the second half of fiscal 2016 to derive adjusted underlying earnings of AUD 352 million. Adjusted earnings beat consensus and our estimates materially by 9% and 16%, respectively. Profit before tax, or PBT, was up across all of the company’s three business units.Our DCF-based fair value estimate of AUD 2.70 per share remains intact despite the positive result, as our longer-term sales growth and operating margin estimates are largely intact. We maintain our high uncertainty rating. Shares continue to trade above our fair value estimate. We see this as reflecting the market's extrapolation of current trading momentum. We do not view Harvey Norman as having an economic moat, as it lacks scale in comparison to larger competitors, who are now increasingly competing for Australian consumers due to digital-enabled distribution channels. The company also operates under a high cost structure supporting a large national store network, which is eroding its competitiveness against Internet-only operators.Analyst: Johannes Faul, CFA

No-moat Harvey Norman reported underlying earnings of AUD 371 million in fiscal 2016, up 38% from the previous year. We adjust this figure by after tax property revaluations of AUD 19 million in the second half of fiscal 2016 to derive adjusted underlying earnings of AUD 352 million. Adjusted earnings beat consensus and our estimates materially by 9% and 16%, respectively. Profit before tax, or PBT, was up across all of the company’s three business units.Our DCF-based fair value estimate of AUD 2.70 per share remains intact despite the positive result, as our longer-term sales growth and operating margin estimates are largely intact. We maintain our high uncertainty rating. Shares continue to trade above our fair value estimate. We see this as reflecting the market's extrapolation of current trading momentum. We do not view Harvey Norman as having an economic moat, as it lacks scale in comparison to larger competitors, who are now increasingly competing for Australian consumers due to digital-enabled distribution channels. The company also operates under a high cost structure supporting a large national store network, which is eroding its competitiveness against Internet-only operators.Analyst: Johannes Faul, CFA

Harvey Norman Firing on All Cylinders as All Stars Align, but We See Significant Downside