The Harvey Norman Holdings Limited (ASX: HVN) share price is having a tough time on Thursday.
At the time of writing, the retail giant's shares are down over 2% to $3.25.
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Why is the Harvey Norman share price falling?
Investors have been hitting the sell button today after the company was the subject of a reasonably bearish broker note out of Goldman Sachs.
According to the note, the broker has downgraded the retailer's shares to a neutral rating and slashed the price target on them by a whopping 28% to $3.40.
The broker has also revised its dividend estimates lower. It is now forecasting fully franked dividends of 31 cents per share in FY 2023 and 27 cents per share in FY 2024. This compares to previous estimates of 36 cents and 30 cents, respectively.
However, it is worth noting that this still implies very generous yields of 9.5% and 8.3%, respectively, so it isn't all bad news!
Why the downgrade?
There are a few reasons for the downgrade. This includes downside risks to earnings, potential market share losses to rival JB Hi-Fi Limited (ASX: JBH), and lower returns on invested capital. Goldman explains:
We downgrade HVN from Buy to Neutral, with a revised TP of A$3.4/sh (previous A$4.7/sh). Despite the already low valuation, we continue to see earnings risk in Net Revenue/Network Sales ratio as well as AR days. Additionally, the company's key growth area is expanding in company-owned stores, signaling higher inventory and capex profile, resulting in lower ROIC.
As a result, we cut our FY23/24/25e sales and EBIT by -2%/-3%/-2% and -6%/-4%/-15% respectively. We now expect company ROIC to fall from 14.2% in FY22 to 8.6% in FY25e. The company is trading at FY24e P/E of 10.5x and implied ex property P/E of 4.6x (assuming 6% cap rate), a substantial discount vs peers and historical average of 15.6x P/E (inclusive of property). We forecast that HVN will continue to lose market share to JBH in FY23/24 as has been the case in recent years.
