Investors don't quite know what to make of Harvey Norman Holdings Limited (ASX: HVN) latest $34 million investment and I don't blame them.
Shares in the furniture and electronics retailer tanked 2.1% to $4.22 this morning, which is twice the loss recorded by the consumer discretionary sector, after management announced that it has bought a 49.9% stake in privately owned farming company Coomboona Holdings.
Harvey Norman has agreed to pay around $25 million for the stake and will advance $9 million to Coomboona, which owns land and farm assets in the Goulburn Valley in Northern Victoria.
Harvey Norman has been riding high lately on the back of its strong full year results and Australian agriculture has been attracting a lot of attention recently for its investment potential in the face of a bright outlook for food exports to Asia.
I think there's good money to be made in Australian agribusinesses and today's news means that Harvey Norman's chairman Gerry Harvey has joined other billionaires like Gina Rinehart and Andrew Forrest in betting big on the industry.
However, I don't think Harvey Norman itself is the right investment vehicle to be making such a bet despite the potentially big payoff for shareholders.
In fact, the decision would make me uncomfortable if I was a shareholder for a few reasons.
Firstly, anyone who bought Harvey Norman shares would be doing so on the premise that it is a well-run retailer with a strong outlook given the housing boom and record low interest rates.
While the investment in Coomboona is relatively small with the group's net profit standing at $268 million, the investment takes Harvey Norman out of its comfort zone and introduces a whole different set of risks for the group. This isn't what shareholders have bargained for.
Further, investing in agribusinesses is a high-risk game that typically takes a long time to deliver meaningful returns. The fact that there aren't any real success stories in the listed agriculture space (not when you compare it to mining, retail, etc) shows you how challenging such investments can be.
Does senior management at Harvey Norman really have the background and experience to undertake this investment, even though Coomboona's current management will continue to run the day-to-day operations?
I would have thought there were other more related businesses Harvey Norman could acquire.
This would never happen at other listed retailers and shows the great control Gerry Harvey has over the company.
At times such autocratic control can be good to drive growth. At other times, it could lead to sub-optimal decisions. Only time will tell but I am a big sceptic.
It's time to switch to JB Hi-Fi Limited (ASX: JBH).
