Why the Harvey Norman share price could be a bargain buy

One fund manager thinks Harvey Norman is still undervalued.

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The Harvey Norman Holdings Limited (ASX: HVN) share price has seen plenty of volatility, particularly pain, over the last year and a half, as we can see on the chart below.

It's understandable that investors are feeling uncertain about the ASX retail share sector considering interest rates are now much higher and inflation is (still) elevated, which could harm the amount that households spend in Harvey Norman stores.

The funds management outfit Wilson Asset Management (WAM) is a believer in the company's prospects and thinks the Harvey Norman share price is worth a lot more than it's currently trading at.

Why did WAM invest in Harvey Norman shares?

Tobias Yao is a fund manager at WAM and recently penned a piece that revealed that in May the investment team looked at a range of ASX share valuations and broker expectations over the next two years, particularly comparing expectations for FY25 to actual results in FY19 on a per-store basis.

One of the stocks that was identified was Harvey Norman, with consensus earnings forecasts (from analysts) showing that FY25 would be lower than the actual earnings reported four years ago, even though the current trading environment is stronger than back in 2019.

With that in mind, the WAM investment team thought the market was pricing in the worst-case scenario for Harvey Norman, which WAM believed was "unwarranted".

WAM first invested in June at a Harvey Norman share price of $3.30, which implied "a lower than book value on the retailer's vast property portfolio". According to the fund manager, this has only happened twice in the last decade and a half, enabling WAM to essentially buy the operating business "for free".

The fund manager said that the catalyst for the company played out when Harvey Norman reported a better-than-expected result, which "prompted analysts to upgrade earnings forecasts by up to 15%."

Earnings recap

There were some declines revealed in the FY23 result, but it was better than expected.

Profit before tax (PBT) decreased by 31.9% to $776.1 million. Company-operated overseas retail stores made 21% of total PBT, excluding net property revaluations. However, overseas retail profitability declined by 40% to $139.1 million because of the economic headwinds and deterioration of confidence in New Zealand and Europe, as well as a "normalisation" of margins and costs globally after COVID-19.

Total systems sales revenue was down 4%, though operating cash flow increased by 13.9% to $680.26 million.

The business said that it's well-placed to benefit from "any upturn in trading conditions and any growth that may arise from the home renovation cycle, new home starts and net migration increases." It also said it's on track to deliver its Malaysian expansion plan.

How much is the Harvey Norman share price worth?

WAM fund manager Yao suggested that looking forward, the investment team believe "the stock is worth above $5.50 per share." That suggests that Harvey Norman shares may be able to rise at least 40% from here, though time will tell how long it takes for the business to recover back to that valuation level.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman. The Motley Fool Australia has positions in and has recommended Harvey Norman. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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