Capital returns loom for shareholders

Harvey Norman, Woolworths and Flight centre top consumer sector firms soon likely to return capital, says UBS.

A Harvey Norman store in Brisbane.

Capital returns are on the horizon in the consumer sector despite heightened competition, UBS predicts.

It said the August reporting season has seen companies reassess capital management strategies.

Harvey Norman, Woolworths and Flight Centre are the most likely to return capital in the near term, UBS analyst Ben Gilbert said in a report.

Mr Gilbert favours companies with international expansion, low exposure to macro slowdown and upside from turnaround.

He also singled out Myer, Coca-Cola Amatil and Metcash, saying UBS was “negative on retailers with a high correlation to a slowing consumer and those facing structural headwinds”.

Harvey Norman is the most likely consumer stock to return capital, according to Gilbert. The company made reference to potential buybacks when it released its results for last financial year.

“While competition in retail is expected to intensify, we see an opportunity in Harvey Norman, given the depressed valuation and scope for capital management,” he said.

UBS predicts an off-market buyback for Harvey Norman — likely to the tune of around $300 million — in part because of around $543m it has accumulated in franking credits.

In its fiscal 2017 result, Harvey Norman management indicated it was undertaking a review of the electronic retailer’s capital management options, with specific reference to a share buyback.

Woolworths is also likely to return capital via an off-market buyback, according to UBS. While the company has no capital management policy, it has returned more than $1bn to shareholders since 2010.

It has also accumulated $2bn of franking credits, which is equivalent to around 8 per cent of its market capitalisation.

“We believe Woolworths has significant funding capacity to undertake capital management,” Mr Gilbert said.

“Continued momentum in food sales and increased market rationality is positive for Woolworths’ credit metrics.”

Flight Centre may also have scope to return capital via dividends, but it may be modest and likely funded through existing cash flows, UBS predicts. The company has accumulated $312m in franking credits. In its annual report, Flight Centre said it aimed to maintain a “conservative funding structure”, but also made reference to potential capital management if it has capital surplus.

Mr Gilbert said Flight Centre could generate around $125m of net cash over the next three years, meaning it could be well equipped of funding returns through both debt and existing cash flow.