What’s going on at Harvey Norman?
More than 28 million shares, or around 2.5% of the issued shares were traded yesterday, driving the shares up to $3.98, two days after the company revealed sales figures showing a sharp decline in topline and same store sales in the four months to April, compared to the first half of the year and the first quarter of the current financial year.
Judging by the market chat, something corporate is going on, or investment analysts obviously don’t yet understand what the Reserve Bank is trying to do in lifting interest rates and slowing retail sales.
The RBA Governor repeated the warning that the economy will slow because of higher interest rates in a speech in Sydney last night.
Investors had accepted that consumer stocks like HVN would be hit, but for some reason, some analysts now reckon they will benefit.
The 24c rise in HVN shares was a near 6.7% rise, one of the sharpest for months and at complete variance to the vibe left by this week’s sales update.
It was in fact the biggest rise in the shares for two years and the shares were up 7.8% at one stage, before falling back.
The shares have risen 11% in the two days since a UBS upgrade, which seemingly ignored what the RBA was doing to retail sales.
Analysts at Citigroup are also optimists and expect HVN to benefit from budget measures announced by the government May 13, including personal income tax cuts and a rebate of as much as $750 for high school students buying computers.
But that was built into the share price in the wake of the Rudd Government’s win a year ago, which helped drive the shares to an all time high of $7.25, before reality set in and the dropped with a thud in the first quarter of this year.
The same mulish bullishness helped David Jones shares have their biggest gain in four months with a 7% rise to $3.72, a jump of 25c.
In contrast to the large volume in HVN there was only 4.23 million DJS shares traded yesterday.
In an optimistic piece of analysis, Bloomberg quoted Adnan Kucukalic, director of research at Credit Suisse as saying: "The budget is aimed toward helping lower income earners who have the greater propensity to spend and we believe that is going straight to the shops. Retailers, especially Harvey Norman, are now cheap. They had been pricing in a recessionary scenario and we don’t think that will be the case.”
He obviously doesn’t understand that if the Reserve Bank sees retail sales rising or inflationary and consumer expectations rising, then the likelihood of another interest rate rise will be on the cards.
Woolworths, which is a better run retailer, saw its shares shed 6c to $28.86.
And like Leighton, cement group, Adelaide Brighton is enjoying earnings growth off the back of the infrastructure and engineering projects booms which are lifting demand for construction materials.
This is one company, like Leighton and other contractors, where a positive impact from the budget can be seen.
The company’s AGM was told yesterday that the upsurge in demand would push 2008 earnings (to December 31) up by at least 9%, sending the shares to their highest level this year.
Adelaide Brighton shares were up 15c or 4.45% to $3.72, the highest level since early last December.
Managing director Mark Chellew told the meeting that the company expected earnings this calendar year to improve to between $118 million and $125 million compared with $113.9 million in 2007.
"Cement demand has continued to increase overall," Mr Chellew told the AGM.
"Any weakness in the residential sector is expected to be offset by continued growth in engineering and infrastructure sectors."
The company has forecast a 5% increase in cement volumes and 3% gain in lime volumes this year and cement prices were likely to rise by the inflation rate or above.
Interest on debt would rise by $8 million because of higher borrowings and interest rates.
Adelaide Brighton is in the process or rolling over $480 million of senior debt that would have expired in March 2009 into two- and three-year tranches after winning approval from its banks.
"Looking at 2008, based on first quarter activity and future demand projections, we forecast a 5% increase in cement and 3% increase lime volumes for this year. Cement demand has continued to increase overall, with growth in Western Australia expected to plateau during 2008 and the continued weakness in New South Wales offset by higher demand in Queensland, Victoria and South Australia," Mr Chellew said in his address.
"Any weakness in the residential sector is expected to be offset by continued growth in the engineering and infrastructure sectors. Expectations of recovery in New South Wales have again been pushed back, now into the first half of 2009.
"The continued increase in global clinker pricing and high shipping rates will give further scope for the recovery of input cost pressures in Australia and cement price increases at or above inflationary levels are projected for 2008."
He said that input cost pressures continue specifically with regard to fuel, electricity, labour and raw materials and the importance of the company’s operational improvement program in mitigating fuel price increases will be an important contributor for 2008.
"C&M Brick faced continued soft demand in New South Wales and steady demand in South Australia and Victoria in the first quarter and will continue to focus on operational improvements to optimise performance.
"Hy-Tec concrete is showing further improvement as growth in south east Queensland and Victoria will offset the co
