Harvey Norman Positioned for Growth Amid Strong Market Dynamics

About Harvey Norman Holdings Limited

Harvey Norman Holdings Limited (Harvey Norman, or the Group, ASX: HVN) was founded in 1961 by Gerry Harvey and Ian Norman as a small electrical goods store in Sydney. The Group today operates mainly as a franchise with over 300 stores in 8 countries. The franchise operations account for about half of the Group’s pre-tax profit. Its two other operating segments are its overseas company-operated retail segment and its property segment, with each contributing around a quarter of Group earnings.

Harvey Norman is the largest owner of Large Format Retail real estate in the Australian market and the Harvey Norman brand is recognised as the leading homemaker brand in Australia.

Freehold property represents 53 percent of total assets

Fifty-three percent of Harvey Norman’s $7.93 billion balance sheet is anchored by a $4.23 billion freehold property investment portfolio. Ninety-four percent or $3.98 billion of these freehold properties are in Australia and New Zealand.

Property ownership is essential to the Harvey Norman integrated business model which relies on the large-format retail (LFR) market to provide Harvey Norman and Domayne branded franchised stores located within close proximity to customers. These franchised complexes and their associated warehouses are high quality properties that are geographically spread throughout the country with a solid tenancy mix. Valuations of these properties have remained resilient in the face of increases in interest rates in recent years.

Although increases in the cash rate have placed slight downward pressure on valuations because of higher capitalisation rates, rental growth in new and renewal leases and low vacancy rates have largely offset the slight softening in LFR property values. The LFR sector is currently receiving solid demand from retailers for existing sites fuelled by a lack of quality LFR supply in the market.

The LFR Centres within Harvey Norman’s Australian investment property portfolio offer a durable competitive advantage because they are in highly desirable, high population growth centres, geographically spread across most metropolitan cities and large regional areas. This extensive LFR footprint facilitates the strong tenancy mix of 470 third-party tenants diversified across Food, Lifestyle & Other Service Retailers, Hardware, Medical, Chemists, and Pets & Auto related products. A significant proportion of these tenants are ASX-listed and are national retailers that support the underlying value of the portfolio. In FY24 the Property Segment contributed 30 percent or $160.6 million to the Group’s pre-tax profit.

Franchisees focused on Home Appliances and Mobile & Computer Technology categories

Franchising operations represent 50 percent of the Group’s pre-tax earnings and are directly correlated to franchisee sales revenue.

Under the Harvey Norman business model, franchisees are supported by financing facilities and promotional assistance to help franchisees enhance customer loyalty and retention. This investment is primarily in the form of bonus gift cards, marketing expenditure, and digital infrastructure that in FY24 was 5.6 percent of Australian franchisee sales revenue.

Harvey Norman is confident that franchises in Australia have a significant opportunity to drive sales growth in the Home Appliances, and Mobile & Computer Technology categories throughout FY25 and beyond.

Overseas Company-operated retail segment

Harvey Norman’s overseas operations comprise 28 company-operated stores in 7 countries representing about 20 percent of pre-tax profit. The aggregate value of overseas owner-occupied and investment property is $639 million. Harvey Norman’s global footprint takes in New Zealand, Singapore, Slovenia, Ireland, Malaysia, Northern Ireland, and Croatia.

Home renovation and new home construction cycle to drive earnings growth

Harvey Norman is strategically positioned to capitalise on improved trading conditions and potential growth from the emerging home renovation cycle and new home construction activity in Australia.

Strong population growth fuelled by high net migration, has created a substantial shortfall in residential accommodation for Australians. Over time, supported by government intervention, the current housing shortage will be addressed, and further capital and new construction and renovation projects will be encouraged.

The National Housing Accord is targeting 1.2 million new, well-located homes over the next five years to 2029. The flow-on effect of new housing stock is likely to increase Large Format Retail spending and support LFR tenants and LFR property values.

The prospect of lower interest rates within the next couple of years both here and overseas should boost consumer demand for home appliances, computers, furniture and bedding and other household formation products. Lower interest rates will be accompanied by lower capitalisation rates that should support property valuations on Harvey Norman’s extensive property portfolio.

Harvey Norman represents over 5,000 brands and more than 300,000 products and with 198 franchised complexes and 120 company-operated stores in 8 countries, reaching 90 million people, shareholders can anticipate steady earnings growth in the medium term