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Harvey Norman - Coggle Diagram
Harvey Norman
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compares the stock price to the company's earnings per share => indicate that HVN needs 12 years of current earnings to recoup the amount paid for the stock
P/E ratio = 4.72/0.391 = 12.07
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(positive) PE vs Industry: HVN is good value based on its PE Ratio (11.9x) compared to the XX Multiline Retail industry average (25.5x).(positive) PE vs Market: HVN is good value based on its PE Ratio (11.9x) compared to the Australian market (22.5x).
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Current ratio: 1.65
In the Australian retail market, optimum current ratios are considered 1.5: 1. This ratio shows that a company should have at least 1.5 times of current assets for the payment of current liabilities (Brigham, Ehrhardt, Nason & Gessaroli, 2016).
Quick ratio: 1.15
In the Australian retail market, optimum current ratios are considered as 0.5: 1.
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Profitability
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Return on Assets ROA = 9.01% => HVN's ROA is higher than that of the industry average
Return on equity (ROE) =14.53% => HVN's ROE is considered low, but still higher than the industry's average
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(negative) PEG Ratio: HVN's earnings are forecast to decline next year, so we can't calculate its PEG ratio.
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Harvey Norman has started FY 2021 in a very positive fashion and has recorded strong sales and profit growth.
According to the release, aggregated sales revenue increased by 28.2% between 1 July and 21 November compared to the prior corresponding period.
This has been driven by strong same store sales growth across almost all regions and particularly in the ANZ market.
Harvey Norman’s Australian franchisees delivered a 30.4% increase in comparable store sales and its New Zealand stores reported a 20.4% lift in comparable store sales. This includes stores that were temporarily closed due to COVID-19.
A total of 18 stores were closed in greater Melbourne from 6 August to 27 October due to stage 4 restrictions. These stores quickly moved to a click & collect and contactless delivery model to limit the sales impact.
A further 10 stores were closed in South Australia for a 3-day period from 19 November in order to prevent a COVID-19 second wave in the region. These stores have now reopened as normal.
Pleasingly, for shareholders, Harvey Norman’s profit growth has been even stronger in FY 2021 thanks to margin expansion.
The release explains that its unaudited profit before tax for 1 July to 31 October was up a massive 160.1% on the prior corresponding period.
Rewards
Trading at 21.3% below our estimate of its fair value
(positive) Below Fair Value: HVN (A$4.65) is trading below our estimate of fair value (A$6)
(positive) Significantly Below Fair Value: HVN is trading below fair value by more than 20%.
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while revenue and cash flow continue to rise in the next 5 years, till 2025, net income will be half from nest year onwards
Analyst future growth forecasts
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Comments
(negative) Earnings vs Savings Rate: HVN's earnings are forecast to decline over the next 3 years (-4% per year).
(negative) Earnings vs Market: HVN's earnings are forecast to decline over the next 3 years (-4% per year).
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(positive) Revenue vs Market: HVN's revenue (11.4% per year) is forecast to grow faster than the Australian market (5% per year).
(negative) High Growth Revenue: HVN's revenue (11.4% per year) is forecast to grow slower than 20% per year.
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Future ROE HVN's ROE is forecast to be low in 3 years time (11.9%)
Past performance 6.1% historical annual earnings growth in the last 5 years => consecutive growth observed in revenue and net income in the last 5 years
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(positive) Accelerating Growth: HVN's earnings growth over the past year (19.5%) exceeds its 5-year average (6.1% per year).
(positive) Earnings vs Industry: HVN earnings growth over the past year (19.5%) exceeded the Multiline Retail industry -31%.
HVN's financial health
(positive) Short Term Liabilities: HVN's short term assets (A$1.3B) exceed its short term liabilities (A$785.4M).
(negative) Long Term Liabilities: HVN's short term assets (A$1.3B) do not cover its long term liabilities (A$1.6B).
Debt to equity level
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(positive) Reducing Debt: HVN's debt to equity ratio has reduced from 27.2% to 8.6% over the past 5 years.
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(positive) Interest Coverage: HVN's interest payments on its debt are well covered by EBIT (32.3x coverage).
Dividend yield of 3.81%
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Notable Dividend: HVN's dividend (3.87%) is higher than the bottom 25% of dividend payers in the Australian market (2.03%).
High Dividend: HVN's dividend (3.87%) is low compared to the top 25% of dividend payers in the Australian market (5%).
Dividend payment
dividend yield rockets in 2021 to 7.4%, with dividend per share is $0.35 (doubled this year). From then onward, dividend yield will fall back to the range between 6-6.4% and dividend per share is about 0.3
(negative) Stable Dividend: HVN's dividend payments have been volatile in the past 10 years.
(positive) Growing Dividend: HVN's dividend payments have increased over the past 10 years.
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reasonably low current payout ratio 0f 45.9% => HVN's dividend payments are well covered by earnings
Future payout to shareholders in 3 the next 3 years are forecast to be covered by 77% earnings
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we consider it a good sign when insiders own a significant stake in a company. In Harvey Norman Holdings' case, its Top Key Executive, Gerald Harvey, is the largest shareholder, holding 34% of shares outstanding.
It seems insiders own a significant proportion of Harvey Norman Holdings Limited. It has a market capitalization of just AU$5.7b, and insiders have AU$2.3b worth of shares in their own names. That's quite significant. Most would say this shows a good degree of alignment with shareholders, especially in a company of this size
The general public holds a 13% stake in Harvey Norman Holdings. This size of ownership, while considerable, may not be enough to change company policy if the decision is not in sync with other large shareholders.
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On the bottom line, underlying net profit after tax and non-controlling interest increased to $462.16 million, up 30.9% from FY19.
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Harvey Norman recorded a positive cash flow from operating activities to $1.1 billion, which grew 183% while earnings per share also rose 15.4% to 39.19 cents.
Temporary overseas store closures during COVID-19 affected FY20 sales performance figures. Government subsidies relieved some pressure with wages and assistance support of $22.28 million and property-related support and assistance of $9.81 million.
The Harvey Norman share price has made a stunning recovery since plummeting to a 52-week low of $2.33 in March. Whilst trading almost 10% lower than the $4.87 reached the month before, the Harvey Norman share price has fallen 2.3% in year-to-date trading.
Harvey Norman has sustained high rates of sales and profit growth since the start of FY21 and there is little sign of an impending slowdown in household goods expenditure.
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As Australians continue to invest in their homes to the detriment of travel, transport and outside entertainment, Harvey Norman ((HVN)) is one of the winners. Consumer expenditure has become heavily skewed to categories such as furniture, bedding and electricals, and to regional locations -- areas where Harvey Norman has a strong presence.
All 18 Victorian stores were closed during the stage IV restrictions and have now reopened. Despite this, strong expenditure on household goods endured and is likely to remain elevated throughout FY21
Sales growth at Australian franchises moderated slightly as the first half unfolded but remains extremely strong. Like-for-like sales growth was 30.4% from July to November 21, slightly lower than the 34.5% recorded for July to September 17. Pre-tax profit was up 160% in the first four months of FY21.
Despite government-enforced store closures globally and a reduction in income support, sales growth has proved resilient and Credit Suisse highlights several company updates have disproved fears of a rapid slowdown in expenditure on household goods.
Assuming a normal pay-out ratio, Harvey Norman is generating a fully franked dividend yield of 6.7% in FY21 and maintaining next to no net debt. Hence, the broker's suspects the business is on track for a record first half.
BUY OR HOLD
Unfortunately for shareholders, while the Harvey Norman Holdings Limited (ASX:HVN) share price is up 12% in the last five years, that's less than the market return. However, if you include the dividends then the return is market beating. The last year has been disappointing, with the stock price down 4.6% in that time.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Over half a decade, Harvey Norman Holdings managed to grow its earnings per share at 9.8% a year. The EPS growth is more impressive than the yearly share price gain of 2.3% over the same period. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 11.10.
Fortunately Harvey Norman Holdings's payout ratio is modest, at just 46% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 26% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Harvey Norman Holdings has lifted its dividend by approximately 3.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Harvey Norman Holdings earnings per share are up 9.8% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.