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Fund manager Sid Choraria, who came first in a competition aimed at identifying the world's most-overpriced stocks, believes Harvey Norman shares are "priced for perfection" and will fall 35 per cent to 40 per cent over the next 18 months to two years.
Mr Choraria accused Harvey Norman of "robbing Peter to pay Paul" by paying underperforming franchisees more than $400 million in tactical support over the last four years while simultaneously jacking up rents to support its property values.
The fund manager also questioned the sustainability of Harvey Norman's franchise structure, pointing out that franchisees paid little upfront capital and received a salary and a car – making them more akin to employees than franchisees.
Mr Choraria, who works for Singapore-based funds management firm APS Asset Management, also raised concerns about Harvey Norman's debt levels, its poor financial disclosure and losses in its international operations, particularly Ireland, which has lost money in eight of the past nine years.
"At $3.70, Harvey Norman seems to be priced for perfection at 48 times free cash flow, unlikely to be sustainable over the long term, given slowing growth and severe competition," said his report, which came first place in a competition run by New York-based SumZero.
Mr Harvey defended Harvey Norman's franchise structure, saying it had been in place for 30 years, had been key to the company's growth and there was no reason to change.
"Because he sees it nowhere else he says it must be wrong," he said
Being T'd up nicely today.
Time to get out big Bertha and smack it into the lake.