Morningstar | Harvey Norman's Sales Growth Picks Up Across All Jurisdictions; FVE Unchanged at AUD 3.40
We increase our fiscal 2019 group sales growth estimate for no-moat Harvey Norman to 4.5% from 4.2% following a trading update at the company’s annual general meeting, with total sales year to date up 2.7%. Our five-year EPS compound annual growth rate is unchanged at 2%, as are our fiscal 2019 EPS estimate of AUD 0.34 and our fair value estimate of AUD 3.40 per share. Our long-term investment thesis is unchanged. We forecast intense competition from JB Hi-Fi, The Good Guys, and Amazon in the core Australian market to restrain franchisees from taking market share. Further, we continue to expect the fierce competition in Australia to result in higher spending on tactical support for franchisees and lower franchising fees, weighing on EBIT margins. At current prices, the shares screen as undervalued.So far this year, Harvey Norman’s franchisees are losing market share. Total sales in the Australian market declined 1.3% over the first 145 trading days of fiscal 2019 to Nov. 23. This is only slightly better than the 2.0% decline reported for the first 60 days of the current fiscal year and likely lifted by the completion of the company’s Australian flagship store in the Western Sydney suburb of Auburn in September. This compares with much better first-quarter fiscal 2019 performance from rival JB Hi-Fi, with total sales growth of 5.3% for JB Hi-Fi Australia and 2.3% for The Good Guys.
The decline in franchisee sales is more than offset by the strengthening international company-operated store network. In constant local currency, sales growth improved in all countries. This was the key driver of our group sales growth forecast increase. In Harvey Norman’s second-largest market, New Zealand, total sales grew 4.7% in the 2019 fiscal year to Nov. 23. We increase our full-year forecast to 4.7% from 3.0% previously. The strongest overseas market is Malaysia, increasing total sales at a rate of 65% year to date, although off a small base.
Malaysia only accounts for an estimated 5% of total group sales in fiscal 2019 versus New Zealand at 12% and Australian franchisees at 72%.
Harvey Norman Holdings is engaged in integrated retail, franchise, property and digital system. Co.'s business activities include: franchisor; sale of furniture, bedding, computers, communications and consumer electrical products in New Zealand, Singapore, Malaysia, Slovenia, Ireland, Northern Ireland and Croatia; property investment; lessor of premises to Harvey Norman®, Domayne® and Joyce Mayne® franchisees and other third parties; media placement; and provision of consumer finance and other commercial advances.
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