Serious Questions Asked About Harvey Norman Loan Business
Serious questions are being asked about the risk Harvey Norman poses to Latitude Financial an organisation who is currently considering a $5 billion float.
Observers of Latitude’s operation are concerned that too much of Latitude’s loan volumes are coming through Harvey Norman stores.
They are concerned that Harvey Norman’s recent poor interim profit result, which triggered a wave of earnings downgrades by analysts, will continue and thereby harm Latitude’s earnings who also have relationships with other retailers including The Good Guys, JB Hi Fi as well as Amazon, Samsung and Apple Pay.
It’s believed Harvey Norman customers account for about 20 per cent of Latitude’s 2.6 million customers, 10 per cent of the Harvey Norman customers are known to default on their loans.
According to the Financial Review, Harvey Norman’s consensus earnings forecasts from nine brokers show earnings per share remaining flat in 2018 and 2019 and then falling in 2020, according to S&P Capital IQ. Bearish analysts forecast declining EPS for at least three years.
It’s also been revealed that 10 to 15 per cent of Latitude’s annual finance volumes are sourced from Harvey Norman. It accounts for about 9 per cent of annual revenue. Latitude earns revenue from Harvey Norman in two ways: the merchant service fee from Harvey Norman for the interest-free product and default interest when the customer cannot meet repayments.
Even though a final decision on the possible $5 billion initial public offering by Latitude Financial won’t be made until the end of May, fund managers are already probing the company on its exposure to Harvey Norman and its subsidiaries.
The relationship between Latitude and Harvey Norman has been a profitable one for both companies. Apart from allowing customers to buy goods up front with no interest payable for several years, the Harvey Norman connection has led to other borrowings on Latitude credit cards that have been used for other purchases.
During a recent roadshow, Sean Morrissey, the chief executive of the former GE consumer finance business, stressed that Harvey Norman is one of about 350 retail partnerships across more than 7900 outlets.
If investors think Harvey Norman will do well in the years ahead there should be no concern about its impact upon Latitude’s profits he claims.