Harvey Norman Faces a Challenging Second Half

We maintain our AUD 3.90 fair value estimate for no-moat Harvey Norman HVN following a weaker-than-expected fiscal 2023 first half to December 2022, and soft trading update for January 2023. We lower our fiscal 2023 earnings estimates by 10% to AUD 0.40, mainly due to a faster-than-expected decline in profit margins in the Australian franchisees and overseas retail segments. However, we still expect group profit margins—defined as profit before tax as a percentage of global sales—to stabilise at long-term maintainable levels of 7% from fiscal 2024.

As we had expected, sales growth momentum progressively weakened in Australia and New Zealand over the first half. However, a further deceleration in sales momentum in Harvey Norman’s two key jurisdictions in January 2023 points to a softer second half for the group than we had previously anticipated. We lower our full-year global sales estimate by 2% to AUD 9.4 billion. A slowdown in consumer spending is also apparent in JB Hi-Fi’s trading update for January 2023. Its total store sales growth at JB Hi-Fi Australia and The Good Guys divisions slowed to 3% and 0%, respectively, from 9% and 7% in the December-half.

The impact of slightly weaker near-term earnings and marginally lower global sales on our fair value estimate is offset by a more optimistic outlook on rental income from Harvey Norman’s property segment. Over the next decade, we now expect rents to increase by 3% per year on average. Previously, we had forecast rents to remain flat because of more muted growth in footfall at brick-and-mortar stores as e-commerce increases in popularity.