Small Cap Monitor:

Retail Booms For Harvey Norman
February 29th 2008 - Australasian Investment Review – (AIR)

Electronics retailer, Harvey Norman posted a 31% increase in underlying profit on Friday, saying it is in a strong position to seize on emerging opportunities.

The retailer posted a $230.15 million net profit, compared with $180.50 million in the previous corresponding period.
Basic earnings per share from continuing and discontinued operations was 21.69% for the half year, up from 17.06 previously.

Harvey Norman said that excluding one-off items and property revaluations, net profit increased to $174.1 million from the previous corresponding period of $132.87 million.

“The result has been achieved by focusing on the group’s core competencies including market leadership achieved by sustained delivery of a dynamic retail offering in the Australian and overseas markets,” the company said.

While the result to 31 December was sound, investors see tougher conditions ahead.

Harvey Norman shares fell as much as 9.7% during intraday trade. Volatile market conditions and fears about consumer spending caused many to run for cover today.

Shares in HVN closed 39 cents lower at $4.55.

The S&P/ASX 200 Index slipped 79 points to 5,572.10 as Reserve Bank’s meeting looms closer, which is widely tipped to bring another interest rate rise.

It is clear that the November rate rise and higher petrol prices didn’t have an impact on consumer spending, but including the February rate rise and another one expected next week, consumer sentiment might be damaged even further.

First-half sales from the franchised Harvey Norman, Domayne and Joyce Mayne complexes, company-owned stores in New Zealand, Slovenia, Ireland and other trading operations totalled $3.04 billion compared to $2.70 billion for the prior year, an increase of 12.4%.

During the six months for December, Harvey Norman opened 13 new stores, 5 of which were in Australia, with rollout of new complexes to continue in the second half of FY2008.

Shareholders will be paid interim dividend of 7 cents per share fully franked, up from 5 cents the prior corresponding period.

IAG Feels The Storm.

Shares in Insurance Australia Group (IAG) fell as much as 8% after the company reported a disappointing 68% fall in its half year net profit due to higher storm costs among other factors.

IAG securities closed 4 cents to $3.77.

For the six months to 31 December 2007, net profit was $110 million, compared to $345 in the previous corresponding period.

Premium revenue was up 15% to $3.9 billion on the back of contributions from the UK businesses acquired last financial year and solid growth in the Australian Personal Lines and New Zealand portfolios.

Chief executive officer, Michael Hawker said the bottom-line result was disappointing but needed to be viewed in the context of a very challenging period for local general insurance industry, with an unusually high number of weather events, volatile investment markets and a soft commercial cycle.

The higher storms and natural events cost the group $326 million (before tax) compared to $125 million incurred in the previous corresponding period.

IAG said the past year has been challenging for the insurance industry, particularly the ‘extent’ of the weather events.

“On the claims side, we’ve had floods, hail and severe storms in Australia, the UK and New Zealand as well as an earthquake in New Zealand,” Hawker said.

Hawker said the group has performed in line with guidance and has initiated productivity improvements and strengthened the management team.

For the full year IAG has reaffirmed the existing guidance of 7-9% gross written premium (GWP) growth and an insurance margin of 9-11%, but is expected to be at the low end of both ranges as a result of further catastrophic events, the ongoing soft market in commercial insurance and currency movements.

“Our key international portfolios of New Zealand and the UK are expected to deliver a stronger and more sustainable performance in the second half,” Hawker said.

The company maintained the interim dividend of 13.5 cents per share.

Hawker said “The outlook for dividends depends on growth in underlying earnings, market conditions and the normal caveats we put on our financial forecast”.

AGK The Company That Surprised Investors.

The company that surprised everyone, even its own management, when it downgraded its full year earnings guidance in October, has confirmed it is on track to meet revised full year guidance after releasing its half year results today.

Australia’s largest gas and electricity retailer, AGL Energy (AGK) reported a net profit after tax (NPAT) of $182.8 million for the six months to 31 December 2007, and remains on track to meet 2008 estimates of between $330 million and $360 million.

NPAT was down 6.5% from $195.6 million reported in the previous corresponding period. AGL noted this was due to increased interest expenses.

The company is on track to deliver FY08 earnings before interest, tax, depreciation and amortisation (EBITDA) of $830 million to $875 million.

“These results confirm that AGL has a strong underlying business. We have also made a number of significant steps in continuing to pursue the company’s integrated energy company strategy,” managing director Michael Fraser said.

AGL’s merchant energy business delivered an operating EBIT result of $238.9 million, up 21% on the previous corresponding period.

AGL said the increase was driven by a 51% rise in earnings from power generation and energy trading which contributed operating EBIT of $145.1 million.

“The strong growth included contributions from the Torrens Island Power Station and Queensland generation and dispatch interests that were acquired in the 2007 calendar year,” the company said.

Its energy business recorded a drop in operating profit EBIT of $134.8 million, down from $136.6 million in the prior corresponding period.

The Sydney-based firm confirmed a fully-franked dividend of 26 cents per share and said it is on track to meet original guidance of between 52 and 55 cps for FY08.

Shares slid 1% to $11.04..

AGL has been trading consistently lower since early October when it fell from $16.74 per share on the back of an earnings downgrade.

This article is contributed by Australasian Investment Review – (AIR) You can subscribe for their free newsletter at

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