I know it’s wrong, but I can’t help coming back to NVN and asking LOVE or HATE the big G?

So as a part of my therapy I have decided to walk in the shoes of both sides of the argument on the business – the Lovers and the Haters – maybe it will make sense then.

WE LOVE YOU HARVEY (BULL)

·        Pretext: Gerry is the best, he is the Warren Buffet of Australian retail and property investing and one of the few who put their money where their mouth is.

1.      EPS and DPS have grown relatively consistently up to COVID and took off in COVID.

2.      ROE and ROC have averaged the mid-teens for the last decade.

3.      His performance during COVID for shareholders, makes Alan Joyce look like an amateur.

4.      Despite a PE re-rating from in line with the market to around half the market, TSR has beaten the market over the last 10 years.

5.      HVN holds property assets valued at $3.4b, the company only has a $4.6b market cap and it returned a 7.3% fully franked dividend (10.4% yield inc FC),

6.      The franchise model NVN operates provides great flexibility and performance management options of locations as well as efficient working capital (Inventory) management.

7.      Working capital growth (Inventory & Receivables) commensurate with sales growth has masked cashflows but will unwind and normalise to improve FCF.

8.      HVN is a leading and long-standing brand the value of which is unrecognised.

9.      Overseas operations offer pathways to growth for the business and is self-funding.

10.  Gerry was the great disrupter in retail and has faced many economic downturns, he is one of the most experienced retailer in Australia, a true asset in facing turbulence ahead.

WE HATE YOU HARVEY (BEAR)

·        Pretext: Gerry is the worst, he is as transparent as Madoff and runs HVN as his private business betting syndicate, underwriting it’s value on paper profits and hot air.

1.      EPS growth has been underpinned by opaque valuation adjustments on the property portfolio whereas cash flow per share has been flat in the 6 years up to COVID showing stagnant returns on operations.

2.      ROE and ROA are messy comparative measures of performance due to the unusual franchise model used and inclusion of valuation adjustment in returns.

3.      COVID stimulus covered up the sins of under investment in online that was Myer like.

4.      EPS and DPS are set to return to pre COVID levels and probably much lower if the highly anticipated recession occurs, which will be the first real recession the business has faced in over 20 years and in a very different world of retail.

5.      Property portfolio valuations are not market tested and even if they had been they face significant downgrades like REITS that specialise in retail space.

6.      The property portfolio is unsellable as it is inexorably linked to the franchise arrangements with the stores and debt forgiveness on rents (aka aggregate financial accommodation) used to protect franchise operations.

7.      The franchise arrangements mask inventory issues which should be treated as being on consignment rather than owned by franchises because when they get into difficulty the inventory is ultimately NVN’s problem.

8.      Cash has been consumed by growing working capital, up from A$916m to A$1,333 YoY for H1 FY23 which is dangerous heading into an economic downturn where high inventory levels will be hard to clear and franchisee debts harder to fund and repay.

9.      Overseas expansion is where Aussie retails go to die, another role of the desperation dice.

10.  HVN faces growing competition and disruption and due to it’s operating model and legacy will fail to maintain its market position, Gerry being the anker to the change needed.

Gerry isn’t going to live forever, that’s for sure, but is that a good or bad thing for Harvey Norman? Either way it doesn’t look like he is going anywhere soon, so any ownership of NVN has to be happy with Gerry running the show.

The above exercise has been helpful, but not conclusive. I recently bought HVN on the post results drop on value grounds and having just pocketed the dividend today I am still trying to assess that decision. 

Valuation: If sales fall about 5% in the next year and then return to a 5% growth, with margins in line with pre-COVID (19%) then I value HVN at around $6.00 currently. But acknowledge that even if this does happen (ie more the above Bull than Bear), the market will dutifully undervalue it and I will have to make good with high yielding dividends to provide an above market return.

Disc: I own - just