A Look At The Fair Value Of Harvey Norman Holdings Limited (ASX:HVN)

Yahoo

01-07-2025

The projected fair value for Harvey Norman Holdings is AU$6.67 based on 2 Stage Free Cash Flow to Equity
Harvey Norman Holdings' AU$5.35 share price indicates it is trading at similar levels as its fair value estimate
Analyst price target for HVN is AU$5.38 which is 19% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of Harvey Norman Holdings Limited (ASX:HVN) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Levered FCF (A$, Millions)
AU$389.3m
AU$441.6m
AU$444.0m
AU$458.0m
AU$525.0m
AU$550.4m
AU$573.9m
AU$596.2m
AU$617.6m
AU$638.7m
Growth Rate Estimate Source
Analyst x4
Analyst x4
Analyst x1
Analyst x1
Analyst x1
Est @ 4.84%
Est @ 4.27%
Est @ 3.88%
Est @ 3.60%
Est @ 3.40%
Present Value (A$, Millions) Discounted @ 8.7%
AU$358
AU$374
AU$346
AU$329
AU$347
AU$334
AU$321
AU$307
AU$293
AU$278
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$3.3b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$639m× (1 + 2.9%) ÷ (8.7%– 2.9%) = AU$12b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$12b÷ ( 1 + 8.7%)10= AU$5.0b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is AU$8.3b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$5.4, the company appears about fair value at a 20% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Harvey Norman Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.7%, which is based on a levered beta of 1.318. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
See our latest analysis for Harvey Norman Holdings
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Multiline Retail market.
Opportunity
Annual revenue is forecast to grow faster than the Australian market.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the Australian market.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Harvey Norman Holdings, we've put together three relevant elements you should consider:
Risks: As an example, we've found 1 warning sign for Harvey Norman Holdings that you need to consider before investing here.
Future Earnings: How does HVN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.
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