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Harvey Norman profit up by $70m (£55.86m) following property revaluation

Harvey Norman

Harvey Norman is on track to post record profits this year as more than $70 million (£55.86 million) in property revaluations augment double-digit earnings growth from furniture, homewares and consumer electronics.

Harvey Norman said on Wednesday it would book as profit more than $70 million (£55.86 million) in net property revaluations on its Australian investment properties in the six months ending December, compared with $20.6 million (£16.44 million) in the same period a year ago.

The first-half revaluation reflects the impact of Australia’s strong property market on Harvey Norman’s $2.4 billion (£1.92 billion) property portfolio and is the highest revaluation since the GFC.

It suggests that the net revaluation for the full year could be more than $100 million (£79.84 million), based on the pattern in past years.

Harvey Norman booked net property revaluations of $48.4 million (£38.64 million) in 2016, helping to lift bottom line net profits by 30 per cent to $348 million (£277.84 million), and booked revaluations of $8.7 million (£6.95 million) in 2015 after a decline in valuations in the previous three years.

Deutsche Bank analyst Michael Simotas said the revaluation was significantly larger than ever before and highlighted the increasing value of Harvey Norman’s underlying assets.

“Importantly, this has no implications for the (first quarter) trading update, which highlighted 25.9 per cent profit growth … because valuations are not done until balance date,” Mr Simotas said. “We continue to expect strong operating results to be reported in February, driven by solid sales and margin expansion.”

The size of the gain in 2017 is, however, likely to add to debate over whether Harvey Norman should book property revaluations above the line or as significant items.

Analysts and investors usually exclude property revaluations from Harvey Norman’s underlying earnings because of the volatility year to year. One analyst on Wednesday welcomed the fact that Harvey Norman disclosed the size of the revaluations – “they break it out, they don’t hide it.”

Harvey Norman chairman Gerry Harvey said the group booked property revaluations in Australia as income, in accordance with Australian accounting standards, whereas property revaluations in New Zealand were taken to the balance sheet.

“It can only go two places, profit and loss or the balance sheet. I don’t care – at the end of the day it has the same result, it increases shareholders’ funds,” Mr Harvey told The Australian Financial Review.

The latest revaluation may add to calls from governance experts for Harvey Norman to consolidate its franchisee and group accounts.

Most of the properties in Harvey Norman’s Australian portfolio are leased to Harvey Norman franchisees.

In a report last year, proxy adviser Ownership Matters called on Harvey Norman to voluntarily consolidate the franchisee network with group accounts to give shareholders a more accurate view of group profits. Consolidation would limit Harvey Norman’s ability to count revaluations of properties leased to franchisees as earnings.

However, Mr Harvey has dismissed the Ownership Matters report and at last year’s annual meeting accused the group of colluding with short sellers, including John Hempton’s Bronte Capital, in trying to drive down the Harvey Norman share price.

“These people are … saying that to depress our share price,” Mr Harvey said again on Wednesday.

Harvey Norman shares have risen 10 per cent to $4.89 (£3.90) since the AGM, although they are trading below last year’s high of $5.38 (£4.29).

Mr Harvey has also defended the group’s accounts, saying they complied with the Corporations Act and accounting standards and had been independently audited.

Analysts say Harvey Norman’s operating cashflow, cash conversion and free cash has been strong for several years. “That doesn’t suggest there’s anything untoward in their accounting,” one analyst said.

Paul

The author Paul