Gerry's a stayer

RESULTS ANALYSIS

Need To Know

• Sales growth is negative double digits.
• Inventory is still too high.
• Property portfolio >$4bn, revaluations added $119m in FY23.

Investment Implications

FY23 results overview:

Underlying Profit Before Tax $680m excluding property revaluations

Franchising operating margin 5.83% (FY22 8.19%)

Property revaluations $119m, total portfolio $4bn

Underlying EBITDA $1,131m

Final dividend 12cps (FY23 25cps, FY22 37.5cps)

The result was largely pre-released, so it was in-line with the market other than a lower final dividend of 12cps. Australian franchisee PBT was $373m implying 2H23 earnings were down -48% year-on-year. International retail earnings fell 40% to $139m PBT. More than half the decline was due to weak conditions in New Zealand (45 stores) where sales fell -8% (NZD) but gross margin was crunched (discounting activity) and operating costs increased.

Australian franchisee sales fell 4.9% in FY23 to $6.42bn but remain well ahead of pre-COVID levels. Franchisee sales momentum is sliding with 2H23 -12.3% and July 2023 comparable store sales grow also -12.6% on pcp. Cooler east coast weather impacted sales of air conditioners and outdoor furniture and BBQs.

HVN’s inventory and receivables remain stubbornly high and presents further gross margin risk in FY24.

HVN’s gross debt (excluding lease liabilities) increased by about $150m to $850m. Its FY23 interest cost increased to $91m from $52m in FY22. On a pre-AASB16 basis (HVN’s basis), gearing is 12.4%, well below its stated maximum of 50%. Including $1.2bn of lease liabilities changes the gearing measure to 44%.

Outlook. HVN’s July comparable store sales growth of -12.6% for July looks weak against the peer group of JBH Australia (-2.9%), The Good Guys (-12%) and Nick Scali (-8.1%). Every international region is also in negative territory for HVN’s July trading update on sales growth.

HVN will open 2 Australian stores (FY23 total 308), 1 in NZ and it will delay 3 store openings planned for Slovenia, Croatia and Hungary into FY25. The Malaysian network is still planned to reach 80 stores by 2028 with 8 stores opening in FY24.

Investment View

The slide in sales and the tardy remediation of the inventory balance are risks to FY24 earnings. The indefatigable chairman, Gerry Harvey, will point to the company’s long track record of having thrived even during times of much higher interest rates and other times of market turmoil. He has a point, and while it suits a long term investor like himself (he owns 33.3% of the company he started in 1982 with Ian Norman), it may not assuage other shareholders. The average tenure of HVN’s Board is 23 years, including Katie Page at 40 years (CEO since 1999). Short term thinking is not in HVN’s repertoire so perhaps critics of short term performance should chill a little. In racing parlance, Mr Harvey is a stayer.

HVN’s balance sheet is not in distress, but the high level of working capital needs to be addressed. In an environment of weak consumer demand and hence slowing sales momentum, defending market share does not make sense, in our view. HVN always has a dual purpose in this regard as it tries to support its 555 individual franchisees across the 197 store Australian network.

Support for franchisees always ranks ahead of shareholders and while there is some logic to this, shareholders often get the short end of the stick as seen in the cut to the FY23 dividend.

HVN has sat on a franking credit balance averaging $560m for the last 15 years and has sustained an average dividend payout ratio of 66% over the same period.

Only on two occasions has the company paid a special dividend and in the case of the 14cps special in FY15, it simultaneously raised $121m of equity at $2.50/share. The 6cps special paid in FY20 effectively ‘replaced’ the 12cps interim dividend that was declared then cancelled in order to preserve $150m of capital.

The company’s property portfolio has fallen to a book value of $2.80 per share, close to what we expected. HVN has historically traded at 1.5x the book value of its property which is within cooee of the current share price.

We think consensus earnings forecasts for FY24 may be trimmed a little but the share price rally over the last month has already brought it back into line with its peers around 12x FY24 PER.

We retain our Hold recommendation.

Figure 1: HVN pretax franchising margin

Figure 2: HVN property portfolio

Figure 3: HVN FY23 earnings

Figure 4: HVN dividend and payout ratio