Prospect of special dividend buoys Harvey Norman

Harvey Norman ‘could consider’ a special dividend or share buyback.

Harvey Norman ‘could consider’ a special dividend or share buyback. Picture: NCA NewsWire/Bianca De Marchi

Shares in Harvey Norman rallied almost 6 per cent after an upbeat trading update and sales outlook at its annual general meeting on Wednesday indicated the retailer is in a position to benefit from a strong housing cycle and Christmas.

Such is the momentum now in the Harvey Norman business, and its retained earnings piling up, that the company could consider a special dividend or share buyback.

Citi analyst Bryan Raymond said in a report to clients that while both sales and earnings had moderated from the previous trading update, the growth run-rate at Harvey Norman remained elevated despite Melbourne temporary store closures restrictions easing.

“Harvey Norman Australia like-for-like sales grew at 34.5 per cent from July to mid-September before moderating to an implied 26 per cent over the last two months,” Mr Raymond said.

“This is a better rate of growth and a slower rate of moderation than that seen by JB Hi-Fi, which slowed from 44 per cent in July to 19 per cent in August/September. We note the timing of trading updates and category mix differs.”

On Wednesday, before its annual meeting was held, the retailer issued a trading update which revealed the strong sales momentum experienced through the COVID-19 pandemic had pushed into the new financial year as consumers filled their homes with fridges, TVs, lounges, computers and coffee machines.

Harvey Norman said pre-tax profit more than doubled between July 1 and October 31, hitting $341.1m for the four months against $131.2m for the same time last year, despite the impact of lockdowns in key markets including Victoria and New Zealand’s Auckland region. Aggregated revenue rose by 28.2 per cent between July 1 and November 21, while comparable sales for the same period increased by 27.5 per cent.

“We remain positive on the medium-term outlook given the strength of the housing cycle likely in 2021 and 2022, which will buffer the rate of earnings normalisation in fiscal 2022 and fiscal 2023,” Mr Raymond said.

The Citi analyst also said there was potential for Harvey Norman to deliver a capital return based on its performance and the strengths of the sector.

“The outsized Australian earnings in fiscal 2020 and fiscal 2021 are likely to generate significant franking credits and retained earnings. Cash levels will normalise with inventory, however low funding costs make capital returns highly accretive.

“We expect the Harvey Norman board to consider an off-market share buyback or special dividend to release some of the excess franking credits ($450m or 36c per share as at June 2020) at the first half 2021 or 2021 results.”

Mr Raymond said the outlook into Black Friday and Christmas 2020 was strong.

“Inventory shortages and reduced discounting levels year on year are the only risks to near-term sales growth. We do expect Harvey Norman to benefit from a strong housing cycle.”

Shares in Harvey Norman closed up 25c at $4.83.