HGH - Heartland Group Holdings

[nevchev]

Just curious. How does a company pay divies to the sharesies crowd with many of them holding 100 shares or less?

[ecuttel]

all company shares are held in trust by sharsies. Company pays Sharsies trust the divie then they apportion it out to individual sharsies account holders based on their holding

[bung5]

Just curious. How does a company pay divies to the sharesies crowd with many of them holding 100 shares or less?

Sharsies is just one shareholder. Very easy

[nevchev]

Sharsies is just one shareholder. Very easy

Ah ok.thanks

[nevchev]

Markets are generally taking a well deserved breather at the moment. Dow was down 500 points last night. Nothing to see here.

"Nothing to see here" you said a mouthfull there.Offer is buy 10k @1.21 and not much after that.When will i learn?

[Beagle]

"Nothing to see here" you said a mouthfull there.Offer is buy 10k @1.21 and not much after that.When will i learn?

They're ex divvy today and trading at $1.24 = $1.265 cum divvy. Depth takes a while to build when a stock goes ex divvy. Have a coffee and relax ?

[sb9]

Holding reasonably well so far after going ex-div...

[nevchev]

Holding reasonably well so far after going ex-div...

Hasnt happened yet

[sb9]

Hasnt happened yet

Not sure what you're inferring there, y'day close was 1.25 and it shed 2.5c divvy today and still trading around 1.25 or so.

[nevchev]

Not sure what you're inferring there, y'day close was 1.25 and it shed 2.5c divvy today and still trading around 1.25 or so.

Sorry,my mistake

[Beagle]

https://www.healthline.com/health/anxiety/tea-for-anxiety#peppermint
I might try some of this this afternoon.

[mike2020]

Not sure what you're inferring there, y'day close was 1.25 and it shed 2.5c divvy today and still trading around 1.25 or so.

So to be clear if I buy today I am buying ex divvy and if Im selling today I have already banked the divvy correct?

[sb9]

So to be clear if I buy today I am buying ex divvy and if Im selling today I have already banked the divvy correct?

Bingo...:t_up:

[percy]

So to be clear if I buy today I am buying ex divvy and if Im selling today I have already banked the divvy correct?

Buying ex divie today.
However holders [ie held yesterday] will receive the divie on 9th October.
The shares were quoted CD cum div yesterday, and are quoted today EX ex divie.

[King1212]

https://www.scoop.co.nz/stories/BU2009/S00510/access-community-health-and-heartland-bank-join-forces-to-enable-ageing-kiwis-to-keep-independence.htm?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Wednesday+3 0+September+2020

[nevchev]

https://www.scoop.co.nz/stories/BU2009/S00510/access-community-health-and-heartland-bank-join-forces-to-enable-ageing-kiwis-to-keep-independence.htm?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Wednesday+3 0+September+2020

Nice to have Access batting for HGH.They are frontline and will be offering the HGH solution as an alternative to going into care.Well done Heartland!!🙌Very clever

[Greekwatchdog]

Have to take my hat off to the team. They really are alternative in lending but do it with a little class...

[nevchev]

Access Community Health
Access Community Health is a leading provider of home based healthcare and support. Care for our community | Work together | Do the right thing | Look after each other.

[RGR367]

I already got enough of it I think but this Access Comm. Health tie up is yet another gut feel sign that I should get more.

[Snoopy]

The 19th March Heartland update didn't read well for business loans

https://www.nzx.com/announcements/350143

"Heartland expects that new lending levels in some portfolios, such as business intermediated and SME, will slow."

But things were a bit more cheerful with the 2nd April response to the government support measures for business,

https://www.nzx.com/announcements/351120

"Heartland Bank has been contacting its business lending customers that are most likely to be financially affected by COVID-19, to discuss their support options. To that end, Heartland Bank is pleased to support the New Zealand Government’s Business Finance Guarantee Scheme, the details of which were announced yesterday. The Scheme enables Heartland Bank, alongside other participating banks, to provide new and existing qualifying business customers with annual turnover of between $250k and $80m with business loans to meet their urgent liquidity and bridging finance requirements while they deal with the disruption to their businesses caused by COVID-19. Heartland Bank looks forward to being able to offer customers that support option and is accepting registrations of interest on its website at www.heartland.co.nz/covid-19-update now."

Under the scheme, businesses with annual revenue between $250,000 and $80 million can apply to their banks for loans up to $500,000, for up to three years.

The real sting was in the next paragraph though:

"Importantly, a range of other support options may be available to all Heartland Bank customers who have been financially affected by COVID-19. All affected customers are encouraged to contact Heartland to discuss support available to meet their loan repayments."

IOW, Heartland would really prefer that businesses sort themselves out without using this particular government scheme. Quite understandable when under it, Heartland would wear 20% of any 'generous' loan that went bad. Other banks seemed to agree. On 1st May, rules around the scheme were changed removing the $250,000 minimum revenue cap and allowing businesses in the agricultural space to join.

https://www.interest.co.nz/banking/104809/government-allows-banks-issue-taxpayer-underwritten-loans-businesses-including-agri

"Secondly, the Government is removing the requirement for a “general security agreement” under the scheme."

"This means that for a loan of more than $50,000, a bank will no longer have to "obtain security from the borrower under a general security agreement". "

"Borrowers will no longer have to draw down on all existing facilities provided to them by their bank before applying for a loan under the scheme."

That last sentence is important. I think it means that Heartland can effectively transfer existing loans, or at least the incremental headroom on existing loans into the scheme. Ultimately Heartland could transfer 80% of the risk of a marginal existing loan to the government. As far as I understand the banking laws, this does not reduce the amount of capital that Heartland needs to hold to support such a loan. But it does support the downside loss of capital if the loan were to go bad.

More recently we have the "COVID-19 Small Business Cash Flow Loan (SBCS)" administered by the IRD.

https://www.interest.co.nz/business/104805/small-business-cashflow-loan-scheme-details-unveiled-govt-write-viable-small

"Robertson said it was necessary for the Government to write businesses loans directly, in addition to underwriting bank loans, as the latter isn't meeting businesses' needs nor the Government's expectations."

The new IRD administered scheme provides an interest free loan for one year for up to $11,800 for a sole trader, to $100,000 for a firm with up to 50 full time employees. The scheme is only open for a one month window commencing 12th May. This must be serious competition for Heartlands 'O4B' on line small business loans. Who would take out a $100,000 loan from Heartland if they could get the same thing from the IRD at no cost? I guess if the IRD loan scheme is extended beyond 12th June , Heartland's O4B might be declared dead. But in the current business environment, I am not sure if this is a negative or a positive!

So what does this picture suggest for profitability in FY2021?

'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.


Whereas I had specified base year earnings figures at EOFY2019, I am using figures from six months later for O4B. Why is that? It is because O4B is a very fastly growing part of the HGH business and I think the EOFY2019 figure would have been too conservative as a base figure from which to derive future earnings



Heartland has been earning an ROE of more than 15% on this O4B portfolio.
If O4B sinks, then the annual tax profit loss for Heartland will be about:

0.15 x $158m = $24m

That is likely an overestimate as O4B also offers partially secured loans of up to $250,000 (well beyond the $100,000 limit of the NZ government scheme) and secured and unsecured loans into Australia. Those boundaries are beyond the IRD scheme. I would estimate the actual annualised profit hit to be 80% of my calculated figure, or around $19m. I estimate the IRD loan scheme may have brought forward about three months worth of loan applications that otherwise might have gone through O4B. If the IRD scheme is dropped on 12th June as planned, then the impact flowing into FY2021 may only be a couple of months. That equates to a reduction in FY2021 profit of $19m x 2/12 = $3.2m.

If the remaining 'outside of government scheme boundary' loans profit of $5m were to sink by 10%, then that would knock $0.5m off annual profits going forwards.

Likewise if the residual O4B loan profit balance of $19m- $3.2m = $15.8m were to reduce by 10%, that would wipe $1.6m off annual profits.

Now putting these three effects together, the expected annual profit decreases from the base year of FY2019 are as follows:

FY2021: -$3.2m - $0.5m - $1.6m = -$5.3m
FY2022: - $0.5m - $1.6m = -$2.1m


Time to update where I thought things were going for O4B in May with what has subsequently (and eventually) been revealed in the annual result.

There were $133m of 'Open For Business' (O4B) loans on the Heartland books at EOFY2019 (p15 AGM Presentation FY2019). That loan balance increased by $25m at the half year point (p9 HY2020 Presentation). But the annual increase had decreased back down to +$22m increment by FY2020 balance date (for a total of $155m). Those who only looked at the year to year increase in O4B balances only saw good news. But take in that half year peak figure from December 2019 and the signs are my much speculated slide has already started. Or was 'the slide' just a three month Covid-19 shock glitch that will all go away?

In the interim to EOFY2020, and using an ROE figure of 15% for O4B loans (p15 AGM Presentation FY2019), we got an incremental NPAT boost for FY2020 of:

0.15 x $22 = $3.3m

A $22m increment to the O4B overall loans balance is equivalent to a $22m/$133m = 16.5% jump in the overall O4B loan book over FY2020. To get back down to FY2019 levels again would require a drop in the loan book size of $22m/$155m = 14.2%. So my 'base line middle case prediction' on the business loan book size for FY2021 is that it will be: 10% + 14.2% = 0.9 x 0.858 = 0.772 = 23% lower at EOFY2021 than it was at EOFY2020.

I was forecasting a proposed 'one off shock' at the end of FY2020 which looks to have happened. My forecast EOFY2021 decline of 10% for the O4B receivables from an EOFY2019 base level, is equivalent to a 23% fall from the EOFY2020 base level. Too harsh?

I see from the IRD website:

https://www.ird.govt.nz/covid-19/business-and-organisations/small-business-cash-flow-loan

-------

Latest developments

The Small Business Cashflow (loan) Scheme has been extended until the end of 2020. Applications opened on 12 May 2020 and can now be submitted up to and including 31 December 2020.

-----------

So I think I am justified in holding my assumptions about the decline in O4B. No small business owner in their right mind is going to get a business loan from Heartland if they can get one from the IRD at 0%. That means very little new O4B business will be written for the first half of FY2021 at Heartland Bank!

SNOOPY

[Snoopy]

'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 and FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

$559.4 x 0.84 x 0.84 = $395m

That number corresponds to the receivables book shrinking by $165m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

$165m x 0.06 = $10m

I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.




Heartland have partnered with at least three intermediary 'FinTech' lenders. Heartland lending through intermediaries increased by $101.7m up 34% on the previous year to $425m at EOFY2019. This represents 38% of all categorised 'business lending' at balance date. That percentage is set to increase as the more traditional -but lower margin- in house 'business relationship lending' book is run down, Heartland's intermediaries are often lenders who have their own independent on line lending platforms. These providers don't need a physical office that customers can visit. Heartland is in fact pushing forward their own business loan expansion targets through these FinTech partners. The three partners they are on record as working with are as follows (see Annual Review FY2017, p13):

1/ 'Spotcap Australia and New Zealand' This company changed ownership on 6th September 2019 for $A9.3m (ZIP HY2020 p6) and is now managed as a division of ASX listed Zip Co. (ASX:ZIP). The purchase included $NZ7m of NZ based receivables and $A23m of Australian SME receivables. 'Spotcap' has been active in Australia since 2015 and active in New Zealand since January 2017. The average Australian loan has a size of $35,000 and has a duration of nine months. A potential New Zealand customer is required to have an 18 month trading history and a turnover north of $200,000. Loans available are in the $10,000 to $250,000 range. There were $A36.9m of receivable loan assets on the books as at 31st December 2019 (ZIP HY2020 Presentation p22). The competitive advantage that Spotcap claim to have is the IP related to their 'Proven SME credit decisioning platform'. However this IP is not owned. It is licensed perpetually from 'Spotcap Global', the Berlin-based FinTech that offers “lending as a service” decision systems around the world.

2/ 'Fuelled' is a New Zealand based start up that has been trading since 2015. The problem that 'Fuelled' was created to solve was to answer the question

"What happens when cashflow gets tight?"

'Fuelled' sees uncollected invoices as having value. So they will lend a company money before an invoice is paid to 'tide them over'. The relationship is purely between the company and 'Fuelled', not with the debtor. Any such transaction is confidential, no personal guarantees are required and costs are simple and transparent. (For example, an outstanding $10,000 invoice can receive $9000 from 'Fuelled', along with a fee of $471 for 30 days cover). 'Fuelled' partners with Xero and MYOB. It can use a customer's own on line information in the cloud to determine how much funding it can provide. This detailed information means that a request in the morning can turn to cash that afternoon. Heartland Bank has a 25% shareholding (a value less that $1m at the time of subscription) in 'Fuelled' bought on 20th February 2017. This investment funded 'Fuelled''s own equity/balance sheet and provided a credit line as well.

The vehicle that runs 'Fuelled' is on the NZ Company's register. "FUELLED LIMITED (5344042) Registered".

https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/5344042

The company last filed a return on 26th March 2019 and is now overdue to file the FY2020 return. It is under threat of de-registration as I write this.


Rechecking the NZ companies database, a tax return was filed in June 2020. This tax return shows Heartland Bank Limited as a 25% shareholder.



I cannot connect to the company website (www.fuelled.co.nz).


The fuelled website is still dead as of October 2020. I can't find any web reference to joint founder Tapio Sorsa, later than June 2017.



Heartland note in their FY2018 presentation that they have made a gain on the sale of Heartland's 'invoice finance business' of $0.6m. I am not clear if this transaction is related to 'Fuelled' or not.

3/ 'Harmoney' (not a spelling mistake)


(Note that Harmoney and other consumer loans are reported on by Heartland separately outside of the header 'Business Intermediated Loans').



So what does this picture suggest for profitability in FY2021?

I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

'Business Intermediated' lending is projected to grow in FY2020.

But I think that by FY2021, it will shrink back down 10% below FY2019 levels (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that there will be lower tradie activity in FY2021, and sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

$42m x 0.13 = $5.5m

The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year.


Business intermediated loans totalled $425m at EOFY2019. By HY2020, just six months later, they had increased by $69m. But then the rate of increase slowed for an overall increment of $74m for the full financial year. This is nevertheless a very impressive $74m/$425m = $500m or a 17.4% increase of 'business intermediated loans' overall over one year.

The incremental increase in the intermediated loan book, using an indicative ROE of 13% (p15 AGM Presentation FY2019) gives an indicative incremental NPAT contribution for FY2020 of:

$74m x 0.13 = $9.6m

To shrink back down to EOFY2019 levels, intermediated business would have to drop by $74m/$500m = 14.8%. So my forecast decline of 10% from FY2019 levels is equivalent to a decline of: 10% +14.8% = 0.9 x 0.852 = 0.767 or 23% from FY2020 levels.

AFAIK almost all intermediated lending is done through 'Spotcap' and possibly Auckland based 'Partpay' (acquired by Spotcap parent ASX:Z1P in August 2019). The NZ side of this business will be facing the same competition as Heartland's O4B from 'IRD Bank' which they will not be able to compete with. There appears to be no equivalent ATO scheme for Australian businesses in Australia. This could indicate more opportunities in Australia over FY2021. But Australian small business has been hit very hard. So I am reluctant to revise upwards my forecast until evidence of Australian small business bouncing back from Covid-19 comes through. From p42 of AR2020 from the ASX listed Zip Co. Ltd.

"Spotcap saw drawdowns drop off in the final quarter of the year (1st April to 30th June) as the impact of COVID‑19 hit SMEs across Australia and New Zealand. Volumes started to increase towards the end of June across a number of resilient industries and the business is well placed offering both standard and SME Guarantee Scheme backed loans to eligible SMEs."

The above quote I would class as 'green shoots of evidence', as opposed to 'evidence'. Let's see what actually happens.

SNOOPY

[Snoopy]

I have humoured everyone by cutting straight to the 'answer'. But this is a situation of considerable uncertainty as to which (or any?) scenario of the ones I have produced is realistic. To understand just how realistic any of these scenarios might be, you have to know what information i put into the model to come up with the answers I did. If I tell you that, and you realise that the profit projections I gave were a result of merely 'turning the handle on the sausage making machine' without any further input from me, then that will allow better judgement as to whether any of the profit projections that I have made make any sense. The table below shows the revenue changes that I have assumed for FY2021 and FY2022 that have changed from the 'base case' (EOFY2019). I am saying nothing about FY2020. I am 'looking through' the current year result because it is likely to be distorted by the advent of Covid-19. So it won't be a good 'base year' to work from.



Three Revenue Forecast Scenarios
Pessimistic View (Post 13411)Middle View (Post 13429)Optimistic View (Post 13438)


Reverse Mortgage Adjustment
Zero Growth => +6.7% compounding existing loans
2.5% Growth => 6.7% + 2.5% = 9.2% compounding of loans
8% Growth => 6.7% + 8% = 14.7% compounding of loans


Motor Vehicle Finance Adjustment (New)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)
45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022)


Motor Vehicle Finance Adjustment (Used)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with revenue stabalising (FY2022)


Business Finance (Part 1) O4B Adjustment
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 15%[, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022)


Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: One off 16% loss from base level to EOFY2021
Intermediated: 10% fall over FY2021, before recovering all of that fall in FY2022


]
Rural Finance Adjustment (None)]
Zero Growth
Zero Growth]
Zero Growth


Harmoney and Other Consumer Lending Adjustment
Collapse of Harmoney over a two year period
Harmoney halved in size from FY2021
Harmoney halved in size from FY2021



None of the above information is new. It has all been disclosed in various previous posts of mine. But something is added by reproducing all of this information together in one place.


The results from FY2020 at last being in the public domain has allowed me to fine tune my Scenario model. I am continuing to use FY2019 as my 'base year' from which the changes outlined in the table below are made.



Three Revenue Forecast Scenarios
Pessimistic View Middle View Optimistic View


Reverse Mortgage Adjustment (Post 13708)
2.5% Growth => 6.7% + 2.5% = 9.2% compounding of loans
8% Growth => 6.7% + 8% = 14.7% compounding of loans
8% Growth => 6.7% + 10% = 16.7% compounding of loans



Motor Vehicle Finance Adjustment (New) (Post 13725)
25% reduction in new three year contracts => 8.333% reduction in annual revenue (FY2021) with an additive a 8.333% reduction in annual revenue (FY2022)
25% reduction in new three year contracts => 8.333% reduction in annual revenue (FY2021) with an additive a 8.333% reduction in annual revenue (FY2022)
25% reduction in new three year contracts => 8.333% reduction in annual revenue (FY2021) with an additive a 8.333% reduction in annual revenue (FY2022)


Motor Vehicle Finance Adjustment (Used) (Post 13715)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with a further 10% reduction (FY2022)
10% reduction (FY2021) with revenue stabilizing (FY2022)


Business Finance (Part 1) O4B Adjustment (Post 13770)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 15%, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%, not compounding (FY2021 & FY2022)
80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%, not compounding (FY2021 & FY2022)


Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment (Post 13771)
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)
Relationship: One off 16% loss from base level to EOFY2021
Intermediated: 10% fall over FY2021, before recovering all of that fall in FY2022

]
Rural Finance Adjustment (Post 13747)]

Rural Relationship Loans - minus 8%, Livestock Loans - minus 5%


Rural Relationship Loans - minus 8%, Livestock Loans - minus 5%


Rural Relationship Loans - minus 8%, Livestock Loans - minus 5%



Harmoney and Other Consumer Lending Adjustment (Post 13749)
Collapse of Harmoney over a two year period
Harmoney halved in size from FY2021
Harmoney halved in size from FY2021



SNOOPY

[Beagle]

I added recently at $1.20 and more at $1.27 both cum divvy. Even at $1.30 I think they have a lot of potential on a look through Covid recovery basis. Wouldn't mind some more...

[sb9]

I added recently at $1.20 and more at $1.27 both cum divvy. Even at $1.30 I think they have a lot of potential on a look through Covid recovery basis. Wouldn't mind some more...

Same here, picked a big lot at 1.17 week before FY results and another big parcel at 1.28 CD recently, should get close to 1.50 in the short term I reckon.

[Snoopy]

While your sell decision was probably made long before Covid-19 arrived on the scene Cyclical, your assessment of $1.27 as 'fully priced value' may yet prove correct. What I see going forwards is a fairly dull finance company, a bit more risk averse than in the past and consolidating around their reverse mortgage offering. Oh and rural lending will just 'chug along'. I see SBS entering the REM market in NZ as adding credibility to the Reverse Equity Mortgage business model. I don't doubt the difficult position of many small businesses throughout NZ. But new small businesses will spring up and someone has to fund them. I don't want to bang the same drum endlessly. But I think it might be instructive to see my three 'future scenarios' stacked up alongside each other.



Three Profit Forecast Scenarios
Pessimistic View (Post 13411)
Middle View (Post 13429)
Optimistic View (Post 13438)



FY2021FY2022
FY2021FY2022
FY2021FY2022


Baseline Reference Profit
$74.5m]

$74.5m
$74.5m
$74.5m
$74.5m
$74.5m
]


Reverse Mortgage Adjustment
$23.7m
$36.8m
$33.0m
$51.8m
$54.1m
$87.3m


Motor Vehicle Finance Adjustment (New)
($11.4m)
($17.1m)
($11.4m)
($17.1m)
($11.4m)
($17.1m)


Motor Vehicle Finance Adjustment (Used)
($11.3m)
($22.6m)
($11.3m)
($22.6m)
($11.3m)
($11.3m)



Business Finance (Part 1) O4B Adjustment
($6.3m)
($3.6m)
($5.3m)
($2.1m)
($5.3m)
($2.1m)

Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment
($15.5m)
($15.5m)
($15.5m)]

($15.5m)
($10.9m)
($5.4m)

]

Rural Finance Adjustment]

$0m
$0m]

$0m
$0m
$0m
$0m


Harmoney and Other Consumer Lending Adjustment
($3.6m)
($7.6m)
($3.6m)
($3.6m)
($3.6m)
($3.6m)


Total Forecast NPAT
$50.1m
$44.9m
$60.4m
$65.4m
$86.1m
$122.3m


No. Shares on Issue
581.0m
581.0m
581.0m
581.0m
581.0m
581.0m


Earnings Per Share
8.6cps
7.7cps
10.4cps
11.3cps
14.8cps
20.1cps



In the middle case, $1.27 would represent a PE of 11 by FY2022. That might be as good as it gets for the next few years. Yet a dividend of 10cps would be a gross dividend yield of 11%. That has be be pretty attractive against getting less that 2% in a term deposit.

For nztx and Beagle, I am forecasting a 'total profit hit' on business loans to be $19.1m (pessimistic), $17.6m (medium) and $7.5m (optimistic) by FY2022. So I am not trying to downplay your concerns. - they are real.


Time to look at what my 'revised scenario assumptions' look like in terms of dollars.



Three Profit Forecast Scenarios
Pessimistic View
Middle View
Optimistic View



FY2021FY2022
FY2021FY2022
FY2021FY2022


Baseline Reference Profit (FY2019)
$74.5m]
$74.5m
$74.5m
$74.5m
$74.5m
$74.5m
]


Reverse Mortgage Adjustment (Post 13708)
$33.0m
$51.8m
$54.1m
$87.3m
$62.0m
$101.0m


Motor Vehicle Finance Adjustment (New) (Post 13715)
($6.3m)
($12.6m)
($6.3m)
($12.6m)
($6.3m)
($12.6m)


Motor Vehicle Finance Adjustment (Used) (Post 13715)
($11.3m)
($22.6m)
($11.3m)
($22.6m)
($11.3m)
($11.3m)


Business Finance (Part 1) O4B Adjustment (Post 13770)
($6.3m)
($3.6m)
($5.3m)
($2.1m)
($5.3m)
($2.1m)


Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment (13771)
($15.5m)
($15.5m)
($15.5m)
($15.5m)
($10.9m)
($5.4m)


Rural Finance Adjustment (13747)
($3.5m)
($3.5m)
($3.5m)
($3.5m)
($3.5m)
($3.5m)


Harmoney and Other Consumer Lending Adjustment (13719)
($3.6m)
($7.6m)
($3.6m)
($3.6m)
($3.6m)
($3.6m)


Total Forecast NPAT
$61.0m
$60.9m
$83.1m
$101.9m
$95.6m
$137m


No. Shares on Issue
581.0m
581.0m
581.0m
581.0m
581.0m
581.0m


Earnings Per Share
10.5cps
10.5cps
14.3cps
17.5cps
16.5cps
23.6cps



By far the largest contributor to the profit jump in my 'Scenario 1b' compared with my 'Scenario 1' has been my revised up incremental earnings from the reverse mortgage business. Yes the smaller than expected drop in motor vehicle finance will help too. But what is perhaps more impressive is that this growth has been projected against a significant fall in the profitability of business loans and consumer lending. The decline in all types of rural lending that I have now included has made little difference to the overall picture. My middle case modelling result for FY2021 conforms very closely to Jeff's $83m-$85m forecast for FY2021. So that gives me confidence I am on the right track with my analysis

Trading at $1.33 today, HGH is on a projected PE for FY2021 of 133/14.3 = 9.3. That looks very fair value in what is otherwise a very heated stock market. However, that 'bargain price' is very much leveraged to the reverse mortgage market. And as the pessimistic scenario shows, there is significant downside to my middle case earnings projections if the reverse mortgage market ceases to grow at a rate we have been used to.

SNOOPY

[nevchev]

So we had a decrease in divies due to RBNZ restrictions. With such a good guidance for next year will heartland take up the slack and provide bumber divies when restrictions come off?

[King1212]

Definitely....HGH was my first initial investment share that I bought....never disappointing me....I sold during the crash....n slowly bought back...if it was not covid..in feb 2020...the SP would be $2

Market screener slapped $1.54...u can also see thier earning forecast model there

[value_investor]

I added recently at $1.20 and more at $1.27 both cum divvy. Even at $1.30 I think they have a lot of potential on a look through Covid recovery basis. Wouldn't mind some more...

I agree 100%. Bought in big at $1.02 and topped up again at $1.23. Happy to keep accumulating at these prices and I see this being very healthy this time next year.

Just my opinion, but I don't think this is the big credit crunch that was 2008. HGH is well positioned to rise once things start going back to normal.

[Snoopy]

So we had a decrease in divies due to RBNZ restrictions. With such a good guidance for next year will Heartland take up the slack and provide bumper divies when restrictions come off?


The RBNZ restrictions are still on, because no-one yet knows how bad the economic effects of Covid-19 will be in NZ. When Auckland goes back to level 1 this time, I see that as the 'end of the beginning' of Covid-19. There are many more future effects of Covid-19 to come. The banks have done OK so far because their customers were on subsidised wages and locked down so many temptations to spend their subsidised money was removed. Thus existing loans, taken out well before Covid-19, continued to be paid down. The effect of Covid-19 that matters is the demand for new loans going forwards. Banks and finance companies are yet to feel this to any great degree.

Traditionally Heartland has always been short of capital. So I wouldn't bet on Heartland having excess capital now, after partially skipping just one dividend because of RBNZ rules. OTOH Covid-19 may have changed the loan landscape so they can't loan out money as before. But if that is what it takes to have excess capital on the books, then you don't want such a scenario to happen, as it means growth going forwards is torpedoed. So best not to hope for a bumper dividend going forwards IMO.




I agree 100%. Bought in big at $1.02 and topped up again at $1.23. Happy to keep accumulating at these prices and I see this being very healthy this time next year.

Just my opinion, but I don't think this is the big credit crunch that was 2008. HGH is well positioned to rise once things start going back to normal.


Value_Investor, as the wise old Snow Leopard has said before: Read note 8 of the annual accounts on "Impaired Asset Expense". Lot's of assumptions built into the HGH growth forecasts including 'no more lockdowns', and a 'relatively quick and full recovery by June 2022'. Look at what is happening in other countries and you will see how optimistic these pre-conditions are. I am not saying HGH is not worth investing in at today's prices (I am still in the process of working this out for myself). I am saying you need to invest with a margin of safety, and that includes assuming a 'new Covid-19 normal' applies from now on. But as a "Value_Investor", you already know this, right?

SNOOPY

[nevchev]

https://www.nzx.com/announcements/360898

[winner69]

https://www.nzx.com/announcements/360898

one thing ...the DRP shares are getting cheaper and cheaper ;)

[Grimy]

one thing ...the DRP shares are getting cheaper and cheaper ;)

Much better deal than last time around........

[winner69]

one thing ...the DRP shares are getting cheaper and cheaper ;)

Indeed ...but we’ve lost heaps since last time .....and the time before that ...and the time before that

DRP was about $1.90 once I think

[Beagle]

Got a term deposit maturing with HGH next week. Could roll it over or reinvest on the other side of the ledger. 1.85% per annum for 3 years or own the shares and what's the likely price on a look through covid recovery basis ? Which investment is likely to be more rewarding. Hmmm...not much thinking required there...

I'm starting to like this creative accounting thing of investing in equities and calling it a quasi bond. Seems to be working okay with GNE and HLG...what could possibly go wrong here lol

[clearasmud]

Got a term deposit maturing with HGH next week. Could roll it over or reinvest on the other side of the ledger. 1.85% per annum for 3 years or own the shares and what's the likely price on a look through covid recovery basis ? Which investment is likely to be more rewarding. Hmmm...not much thinking required there...

I'm starting to like this creative accounting thing of investing in equities and calling it a quasi bond. Seems to be working okay with GNE and HLG...what could possibly go wrong here lol
Nothing they're smart.

[Snoopy]

No one knows exactly how this Covid-19 tail may whip around and strike down HGH profits in the future. But I would argue you don't have to know this to build an investment case. I would argue the solution to investing in these circumstances is to do a 'Scenario Analysis'. That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: Scenario 1b, Scenario 2b and Scenario 3. I assess that the likelihood of each of these scenarios occurring in order is 30%, 50% and 20% (observant readers will notice these three relative probabilities add up to 100%).

So what happens when I combine my forecast from each scenario in those proportions?



FY2021epsProbabilityFactored Earnings Contribution


Scenario 1b8.6c30%2.58c


Scenario 2b10.4c50%5.20c


Scenario 314.8c20%2.96c


Total100%10.7c





FY2022epsProbabilityFactored Earnings Contribution


Scenario 1b7.7c30%2.31c


Scenario 2b11.3c50%5.65c


Scenario 320.1c20%4.02c


Total100%12.0c



Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.

FY2021: $1.07 to $1.28
FY2022: $1.20 to $1.44

With the share trading at $1.33 today, I would argue the share price has got ahead of itself and is now in the mid price range of FY2022 earnings projections. There are too many uncertainties about to justify buying in at this price now. I would like to increase my own stake in HGH further. But I am going to wait for a pull back in the share price before I do so.

discl: hold HGH with an average holding price of $1.40 (excluding dividends). Of course most of that holding was accumulated pre Covid with different earnings expectations!


Time to update my 'Scenario Analysis' to the revised Scenarios that I have worked through . That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: 'Pessimistic', '"middle of the Road' and 'Optimistic'. I assess that the likelihood of each of these scenarios occurring in order is 20%, 50% and 30% (observant readers will notice these three relative probabilities add up to 100%).
I have tweaked these probabilities a little from 'Iteration 1'.

So what happens when I combine my forecast from each scenario in those proportions?



FY2021epsProbabilityFactored Earnings Contribution


Scenario 1b10.5c20%2.10c


Scenario 2b14.3c50%7.20c


Scenario 316.5c30%4.95c


Total100%14.3c





FY2022epsProbabilityFactored Earnings Contribution


Scenario 1b10.5c20%2.10c


Scenario 2b17.5c50%8.75c


Scenario 323.6c30%7,08c


Total100%17.9c



Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.

FY2021: $1.43 to $1.72
FY2022: $1.79 to $2.15

With the share trading at $1.34 today, I would argue the share price is trading at an 8 to 23% discount to fair value on FY2021 earnings. This would suggest we are in a 'top up window' time, despite the recent strong share price rally since the dividend was paid.

SNOOPY

discl: hold HGH with an average holding price of $1.31 (excluding dividends). Haven't done as well as some here with HGH, but nevertheless managed to top up during the Covid wobbles to bring me back into the black.

[King1212]

Nah .... brokers target $1.54

[winner69]

Nah .... brokers target $1.54

Was over 2 bucks once ......and was making less than it is now

Brokers just stay ahead of current price ..they have a abacus that helps them calculate that

[Snow Leopard]

Happy enuf to get a few more shares at $1.24695055 each. Would have preferred it if they had have been another 1/1,000,000 of a cent cheaper.

As for value: we live in interesting times. :scared:

[waikare]

Indeed ...but we’ve lost heaps since last time .....and the time before that ...and the time before that

DRP was about $1.90 once I think

DRP Sept 2019 $1.54, and March 2020 $1.59

[Beagle]

I am also pleased with the dividend reinvestment plan price.
At the mid point of HGH's FY21 forecast $84m this gives 14.4 cps earnings.
The average FY21 PE ratio of the six Aussie banks I follow is currently 12.6.
The other hound has expended vast amounts of energy with his comprehensive analysis and good on him.
I am going to simply run with the company's own estimate of 14.4 cps and accept the average forward PE ratio of the 6 Aussie banks I follow as being a reasonable proxy for fair value that currently encompasses all known and expected risks and opportunities.

I therefore have a price target of 14.4 cps x 12.6 = $1.81 for HGH. Obviously there are real risks around how long Covid persists and the depth of the recession in N.Z. however that's already priced in with that low PE in my view as I know HGH has previously had a normal PE range within business cycles of 11 -17.5.

HGH looks very good value to me but I think that about all the stocks I own lol

Disc: I bought more today.

[King1212]

Dang master...I wish I have more fund like u!!

[Snoopy]

The other hound has expended vast amounts of energy with his comprehensive analysis and good on him.
I am going to simply run with the company's own estimate of 14.4 cps and accept the average forward PE ratio of the 6 Aussie banks I follow as being a reasonable proxy for fair value that currently encompasses all known and expected risks and opportunities.


Just in case others were wondering why I spent 'vast amounts of energy' getting the same figure as Jeff who told shareholders what next years earnings expectation is. The point was not the answer (although it is nice to know I am on the same page as Jeff). The point is to know what drives the answer. So that 'when stuff happens' (and I think Covid-19 has some more surprises to deliver yet) I will know how to react when the news comes along, by being able to discern what news is just 'shock value' and what news will have a 'real ongoing effect' of HGH going forwards.

SNOOPY

[freddagg]

Was over 2 bucks once ......and was making less than it is now

Didnt someone once mention that they sold at $2.14

[Baa_Baa]

Didnt someone once mention that they sold at $2.14

That was pretty bloody clever with hindsight wasn’t it, unlike some who have held and plumbed the depths. Oh well, hopefully we’re on the way to recovery. This is my dog, if it wasn’t for the dividends it would be under water. I hate sideways shares as much as losers. Kicking myself for not having the fortitude to quit this pig dog when it broadcast capital losses.

[Beagle]

Didnt someone once mention that they sold at $2.14

I couldn't possibly comment lol

Next time we get there it will be on much stronger fundamental's.

[Waltzing]

We were considering holding but in april we move it into ARG for a profit...Now ARG doesnt have the same growth potential but who says we have seen the end of winter...

[Snoopy]

YearDividends Paid 'per share'Significant Event During Year'


FY2013 1.5cps(sp) + 2.0cps17th December 2012: Heartland becomes a bank

[/TR]

FY2014 2.5cps + 2.5cps1st April 2014: Seniors 'Reverse Mortgage' Business Acquired








FY20153.5cps + 3.0cps10th September 2014: invests in Harmony P2P startup


28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)


FY20164.5cps + 3.5cps


FY20175.0cps + 3.5cps


FY20185.5cps + 3.5cps


FY20195.5cps + 3.5cps1st November 2018: Heartland Group Holdings restructure set up


FY20206.5cps + 4.5cps


Average FY2016 to FY2020 inclusive9.00cps



I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.




Updating my dividend record for the about to be received final dividend payment from FY2020 earnings, paid in FY2021.



YearDividends Paid 'per share'Significant Event During Year'


FY2013 1.5cps(sp) + 2.0cps17th December 2012: Heartland becomes a bank

[/TR]

FY2014 2.5cps + 2.5cps1st April 2014: Seniors 'Reverse Mortgage' Business Acquired








FY20153.5cps + 3.0cps10th September 2014: invests in Harmony P2P startup


28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)


FY20164.5cps + 3.5cps


FY20175.0cps + 3.5cps


FY20185.5cps + 3.5cps


FY20195.5cps + 3.5cps1st November 2018: Heartland Group Holdings restructure set up


FY20206.5cps + 4.5cps2nd April: RBNZ Covid-19 Package suspends NZ bank dividends to shareholders


FY20212.5cps + ?.?cps


Average FY2016.5 to FY2020.5 inclusive8.70cps



I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.

SNOOPY

[Beagle]

We were considering holding but in april we move it into ARG for a profit...Now ARG doesnt have the same growth potential but who says we have seen the end of winter...
ARG is a good hold for yield, (and I hold some) but my view is that HGH has the better potential Covid look through recovery return. On a full Covid recovery this could be earning 17 cps in 2-3 years time and put a mid point of its historical PE range (say 14) on that and in due course we could see PE14 x 17eps = $2.38. It has traded on a historical PE of as much as 17 before. Ask me how I know :D

Having a few dollars in each of these two isn't a silly move at all.

[Snoopy]

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation.

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

9.0c / (0.72 x 0.075) = $1.67

A reminder here that NTA was

($687.600m - $72.159m) / 577.468m = $1.07 cps

at the half year FY2020 balance date. This means my 'fair valuation' is at a good premium (+56%) to net tangible asset value.

This $1.67 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target share price range for HGH of $1.34 to $2.00. $1.90, where the share is trading today, looks a ten cents or so above fair value. My target accumulation price (10% below fair value) is now $1.50. And yes I could add the upcoming 4.5c interim dividend onto that fair value.


When valuing a share, it usually pays to check out value from more than one perspective. This valuation considers what HGH might be worth from purely a dividend paying perspective.

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation.

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.7c / (0.72 x 0.075) = $1.61

A reminder here that NTA was

($699.980m - $72.813m) / 580.979m = $1.08 cps

at the full year FY2020 balance date. This means my 'fair valuation' is at a good premium (+49%) to net tangible asset value.

This $1.61 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target share price range for HGH of $1.29 to $1.93. $1.34, where the share is trading today, looks 27 cents or so below fair value. My target accumulation price (10% below fair value) is now $1.45. I should note here that if the permissions to pay bank dividends dividends are not fully restored by the RBNZ by the time the traditional dividend in March 2021 is paid, then the calculations in this post will have overvalued the HGH share.

SNOOPY

[zs_cecil]

Hi Snoopy, the "Heartland Bank" part of the business doesn't look good indeed based on your numbers. We would see a decreasing revenue plus decreasing margin for the banking business (mentioned by the management). The dividend from the banking business would be sliding too regardless of the dividend suspension ( I might be over pessimistic here :-) ). So, I think the PE assumption/calculation would slowly become out of reality because most of the earning growths are from the reverse-mortgage business. By looking at your numbers, I can see why the HGH board is complaining about the valuation of the company.

Here is one scenario I imagine :-)

Perhaps, HGH would want to take out its non-banking business entirely and list it in ASX. This would immediately make the dividend yield look fancier hence drive up the value.
In the meantime, they would leave the banking business in NZX. The banking business eventually becomes a real "boring" dividend-paying bank after its revenue/profit become stable after Covid-19.

[winner69]

I am also pleased with the dividend reinvestment plan price.
At the mid point of HGH's FY21 forecast $84m this gives 14.4 cps earnings.
The average FY21 PE ratio of the six Aussie banks I follow is currently 12.6.
The other hound has expended vast amounts of energy with his comprehensive analysis and good on him.
I am going to simply run with the company's own estimate of 14.4 cps and accept the average forward PE ratio of the 6 Aussie banks I follow as being a reasonable proxy for fair value that currently encompasses all known and expected risks and opportunities.

I therefore have a price target of 14.4 cps x 12.6 = $1.81 for HGH. Obviously there are real risks around how long Covid persists and the depth of the recession in N.Z. however that's already priced in with that low PE in my view as I know HGH has previously had a normal PE range within business cycles of 11 -17.5.

HGH looks very good value to me but I think that about all the stocks I own lol

Disc: I bought more today.

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech

Thus a PE of at least 20 as a bare minimum ....value about $3

[Snoopy]

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech
https://nz.trustpilot.com/review/spotcap.co.nzhttps://nz.trustpilot.com/review/spotcap.co.nz
Thus a PE of at least 20 as a bare minimum ....value about $3


Slashing your branch network, outsourcing your face to face customer interactions to Westpac and putting your banking functions on apps does not make you a 'fintech'. Heartland has certainly invested in Fintechs. "Spotcap', a web based loan provider, seems to be their most prominent investment.

The competitive advantage of 'Spotcap' seems to be a black box decision making algorithm that can sniff out business loan opportunities that conventional banks might turn down. But things have gone very quiet since the Covid-19 crash.

https://nz.trustpilot.com/review/spotcap.co.nz

After a series of glowing reviews, there are no comments about any 'Spotcap' loans being approved since the Covid-19 lock down. If you go to the 'spotcap.co.nz' website, it redirects to

https://business.nz.zip.co/?utm_medium=company_profile&utm_source=trustpilot&utm_campaign=logo_click

Now 'Zip' is the parent company of 'Spotcap'. So has 'Spotcap' and their 'exclusive super algorithm' been found wanting and now died? Has it just been rebranded as 'Zip', or has 'Spotcap' business been redirected to parent Zip? If no new loans have been approved since the Covid-19 lock down, what benefit does 'Spotcap' offer to Heartland shareholders going forwards?

Next we move to Heartland's 25% stake in invoice book loan company 'Fuelled', run by the mysterious Finn Tapio Sorsa out of Wellington.

https://www.dnb.com/business-directory/company-profiles.fuelled_limited.b96f14674d4b29cb0e690bdb8 3b285b1.html

It has twelve employees and turnover of $US2.03m. However, they were late with filing their paperwork with the companies office this year and the website, www.fuelled.co.nz, is down. So I am unclear if this business is still operating.

It looks to me as through the 'Fintech' coat of paint on the Heartland brand is looking a little thin.

SNOOPY

[winner69]

Thanks Snoops. Lot of research there

Sounds like Heartland get involved in a few dodgy things ....hope being dodgy isn't part of the Heartland DNA

[Snoopy]

Hi Snoopy, the "Heartland Bank" part of the business doesn't look good indeed based on your numbers. We would see a decreasing revenue plus decreasing margin for the banking business (mentioned by the management). The dividend from the banking business would be sliding too regardless of the dividend suspension ( I might be over pessimistic here :-) ).


The truth is everyone IMO, including management, are flying blind on the banking side of the business. All we know -so far- is that given a wage subsidy, many businesses that could have been in serious trouble were able to keep operating and paying their loans (or were allowed to compound their loan debt!). We also know that there is a banking culture of declaring 'compounded debt' not to be impaired. That could come back to bite later. I think doing business internationally will continue to be problematic. So a revival in small business in NZ, a key target group for Heartland's O4B loans, will likely be from a resurgence in NZers selling 'home branded jam' to each other. And I am talking about jam both in the literal and 'added value' sense. Ultimately though, there is only so much money kiwis can make selling jam to each other. While I hope my somewhat downbeat outlook on business loans is wrong, as an finance sector investor I feel that I should take a slightly gloomy outlook to what I see as the riskiest part of the Heartland loan book. I don't yet know whether my gloomy outlook on business loans is the true picture, and neither, I suspect, do Heartland management. But if the business case for Heartland stacks up, despite this gloom, then I have no problem putting more of my investment capital into Heartland. So far, IMO, the overall investment case for Heartland does still stack up.



So, I think the PE assumption/calculation would slowly become out of reality because most of the earning growths are from the reverse-mortgage business. By looking at your numbers, I can see why the HGH board is complaining about the valuation of the company.

Here is one scenario I imagine :-)

Perhaps, HGH would want to take out its non-banking business entirely and list it in ASX. This would immediately make the dividend yield look fancier hence drive up the value.
In the meantime, they would leave the banking business in NZX. The banking business eventually becomes a real "boring" dividend-paying bank after its revenue/profit become stable after Covid-19.


My somewhat rosy assessment of the Heartland Reverse Equity Mortgage business is based on:

1/ A good track record of growth in writing REM business.
2/ A modest overall market share position in REM with plenty of room to grow.
3/ Heartland being the leading provider in new REM business in Australasia. Indeed the former big bank competition is no longer taking on any new business.

I also noted that, as well as being fully imputed, the latest dividend of 2,5cps is also fully franked for Australian shareholders. That makes sense when you realise that HGH business outside of Heartland Bank is centered around growing reverse mortgages in Australia. So I agree with you Cecil. There could very well be a case for Heartland Group Holdings listing a 'not a bank' financial entity in Australia, specialising in REM loans.

SNOOPY

[percy]

Thanks Snoops. Lot of research there

Sounds like Heartland get involved in a few dodgy things ....hope being dodgy isn't part of the Heartland DNA

If so they have a long way to go to catch up with their Aussie counterparts..lol.

[Beagle]

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech

Thus a PE of at least 20 as a bare minimum ....value about $3

:) Love it. If we get a strong recovery out the other side of Covid I can foresee 18 cps in earnings in a few years...put a growth / recovery PE on that of say 15 and $2.70, (double your money from here) is certainly a possibility in a few years time.

Hey Percy, you back into these yet ?...oh and BTW oh my goodness...I can scarcely believe it myself... I bought a small stake in TRA today for yield. I must be unwell...better go and see the Vet lol

[percy]

Just what we would expect from a board whose members are substantial shareholders.It is called "the owners eye."

Disc.I am again a shareholder.[45% of what I used to hold].

Yes as per the above post I brought back in on 17th September.
My TRA money I spent on Unlisted SFF,so have not brought back in yet. It will happen but I don't know when.

[Snoopy]

The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2019 is derived from note 23 in AR2019 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan Maturity
Expected Behaviour Multiple
FY2014 Financial Receivables Maturity: Contracted/ Expected
FY2015 Financial Receivables Maturity: Contracted/ Expected
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected
FY2019 Financial Receivables Maturity: Contracted/ Expected


On Demand
100%
$50.254m / $50.254m
$37.012m / $37.012m
$84.154m / $84.154m
$57.040m / $57.040m
$49.588m / $49.588m
$80.584m / $80.584m


0-6 months
132%
$477.190m / $629.445m
$664.557m / $877.215m
$743.389m / $961.274m
$618.271m / $816.118m
$609.268m / $804.234m
$1,020.160m / $1,346.611m


6-12 months
132%
$367.564m / $483.727m
$450.638m / $594.842m
$484.420m / $639.962m
$521.215m / $688.004m
$469.632m / $619.914m
$646.123m / $852.882m



Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit Maturity
Expected Behaviour Multiple
FY2014 Financial Liabilities Maturity: Contracted/ Expected
FY2015 Financial Liabilities Maturity: Contracted/ Expected
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2018 Financial Liabilities Maturity: Contracted/ Expected
FY2019 Financial Liabilities Maturity: Contracted/ Expected


On Demand
3.01%
$629.125m / $18.922m
$748.332m / $22.450m
$718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m
$895.210m / $26.946m


0-6 months
32.4%
$748.129m / $242.431m
$1,213.450m / $395.102m
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m
$1,531.594m / $496.236m


6-12 months
36.4%
$538.050m / $195.682m
$686.159m / $249.762m
$837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m
$620.836m / $225.984m



Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



Loan-Deposit Maturity
FY2014: 'Expected' combined Loan and Deposit Cashflow
FY2015: 'Expected' combined Loan and Deposit Cashflow
FY2016: 'Expected' combined Loan and Deposit Cashflow
FY2017: 'Expected' combined Loan and Deposit Cashflow
FY2018: 'Expected' combined Loan and Deposit Cashflow
FY2019: 'Expected' combined Loan and Deposit Cashflow


On Demand
$31.332m
$14.562m
$62.524m
$31.851m
$21.765m
$53.620m


0-6 months
$387.014m
$482.113m
$691.960m
$429.924m
$368.352m
$850.375m


6-12 months
$288.045m
$345.080m
$334.987m
$422.595m
$411.440m
$626.898m


Total
$706.391m
$841.755m
$1,089.471m
$884.370m
$801.557m
$1,530.893m



Once again lots of numbers here. Now there are six years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:

1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position has strengthened considerably, only being bettered by FY2016. This signalled a likely reduction in Heartland's 'on call' account holder interest rates (a drop which has subsequently happened). Depositors looking to invest with Heartland for up to six months are likely to be similarly disappointed.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:



Heartland 'Direct Call' ($1 minimum)1.60%


Co-Operative bank ($100,000 minimum)0.75%


SBS bank ($100,000 minimum)0.75%


TSB Horizon Savings ($1 minimum)0.90%



Heartland's call rate has dropped from 2.75% to 1.6% over the year. Other comparable deposit takers have dropped their rates too, albeit not as much in percentage terms. This is exactly what I predicted last year, when more outsourcing of debt via Australian bond issues was mooted. Cash fund depositors may think they have taken a 'hit' already. With more alternative Australian bond issues confirmed to fund the Australian expansion, I predict Heartland's on call rate to be significantly lower again in twelve month's time.

Expected cashflow for the 0-6 months has turned right around with Heartland now expecting an avalanche of cash to come due. This indicates we can expect Heartland's rates offered for six month term deposits to be toward the bottom end of their comparative peer group.



Heartland ($1,000 minimum)2.80%


Co-Operative bank ($5,000 minimum)2.80%


SBS bank ($5,000 minimum)2.80%


ANZ bank ($10,000 minimum)2.80%



There seems to be a 'consensus at the bottom'. Maybe the other BBB rated banks are also suffering from an excess of short term 'term deposit money'? If you have just $1,000 to invest then Heartland is competitive. But more than that and you would have to look very closely at investing in those lesser tier banks. I have thrown ANZ , a AA- rated bank, in there and can confirm that BNZ, ASB, Westpac and Kiwibank also offer a 2.8% return on a $10,000 investment over six months. If you have that $10,000 to invest, and there is no interest premium price to be paid by loaning your money to a lower credit rated BBB rated bank, why do it? And if Heartland doesn't really want to attract short term deposit money anymore, what does that say for their lending outlook going forwards?


The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2020 is derived from note 23 in AR2020 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.



Loan Maturity
Expected Behaviour Multiple
FY2016 Financial Receivables Maturity: Contracted/ Expected
FY2017 Financial Receivables Maturity: Contracted/ Expected
FY2018 Financial Receivables Maturity: Contracted/ Expected
FY2019 Financial Receivables Maturity: Contracted/ Expected
FY2020 Financial Receivables Maturity: Contracted/ Expected


On Demand
100%
$84.154m / $84.154m
$57.040m / $57.040m
$49.588m / $49.588m
$80.584m / $80.584m
NM / ?


0-6 months
132%
$743.389m / $961.274m
$618.271m / $816.118m
$609.268m / $804.234m
$1,020.160m / $1,346.611m
NM / ?


6-12 months
132%
$484.420m / $639.962m
$521.215m / $688.004m
$469.632m / $619.914m
$646.123m / $852.882m
NM / ?



In the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.



Deposit Maturity
Expected Behaviour Multiple
FY2016 Financial Liabilities Maturity: Contracted/ Expected
FY2017 Financial Liabilities Maturity: Contracted/ Expected
FY2018 Financial Liabilities Maturity: Contracted/ Expected
FY2019 Financial Liabilities Maturity: Contracted/ Expected
FY2020 Financial Liabilities Maturity: Contracted/ Expected


On Demand
3.01%
$718.587m / $21.630m
$836.829m / $25.189m
$924.072m / $27.815m
$895.210m / $26.946m
$813.140m / $24.476m


0-6 months
32.4%
$892.944m / $289.314m
$1,191.957m / $386.194m
$1,345.316m / $435.882m
$1,531.594m / $496.236m
$1,466.046m / $474.999m


6-12 months
36.4%
$837.844m / $304.975m
$729.145m / $265.409m
$572.731m / $208.474m
$620.836m / $225.984m
$900.558m / $327.803m



In the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.



If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



The problem is that -this year- we cannot do this, because Heartland has provided no information on the maturity profile of loans coming due in the FY2021 financial year. I contend that this means the information supplied on liquidity in this years financial report is a joke. Measuring liquidity is a complex exercise done by comparing expected (not contracted ) cash inflows from maturing receivables loans to expected (not contracted) cash outflows from repaying debenture holders. This I understand. But to provide no information at all on maturing receivables means that measuring liquidity on a short term (or any term) basis is actually impossible.

I am at a loss to explain what Heartland are trying to achieve by only disclosing one half of their liquidity story. I think the level of disclosure under Note 23 in the FY2020 accounts is woefully inadequate. When information is withheld that has historically been disclosed, it always begs the question, what are Heartland trying to hide?

I see that in Note 1 of the accounts Heartland says:

"The Group has responded to the pandemic by working with its customers to understand their needs and provide them with the financial support that best meets their requirements. To date, that support has included participating in industry wide measures (such as the mortgage deferrals programme and the provision of liquidity under the Business Finance Guarantee Scheme (BFGS) program), and implementing other measures such as temporary payment reduction or payment deferral arrangements for both business and consumer customers. The Group has also developed a product, Heartland Extend, which provides customers with flexible payment options."

The government's 'business finance guarantee scheme' is still, AFAIK, performing well below target because, even with the government guaranteeing 80% of a loan that goes bad, the bank still loses the unguaranteed 20%. Why has the bank not told shareholders what the 'temporary payment reductions' (that means deferred interest and/or capital repayments) or 'payment deferral arrangements' (changing the contractual repayment dates of loans) are? And isn't 'Heartland Extend' a way to keep what would normally be called a bad debt out of the bad debt totals? How can Heartland get away with not declaring the quantum of any of this stuff?

SNOOPY

[Beagle]

Yes as per the above post I brought back in on 17th September.
My TRA money I spent on Unlisted SFF,so have not brought back in yet. It will happen but I don't know when.

Good on ya mate.

I burst out of my kennel this morning with another buy order. With you and both Beagles leading the hunt what could possibly go wrong lol

[percy]

Good on ya mate.

I burst out of my kennel this morning with another buy order. With you and both Beagles leading the hunt what could possibly go wrong lol

In a word "plenty"....lol.

[Norwest]

Snoopy, in your bottom two tables FY19 and FY20 data is exactly the same, is that a mistake?

[Snoopy]

Snoopy, in your bottom two tables FY19 and FY20 data is exactly the same, is that a mistake?


Look right at the bottom of the post and you will see the rider 'work in progress'. You will also see that at the time you wrote your message I have not signed it. Those are my two indicators that the post is not finished. A post like this takes a while to compile.

SNOOPY

[Beagle]

While the other Beagle is extremely busy barking loud and very long I have been extremely busy biting over and over again...chunks of shares off the sellers. I wonder which will be the more profitable approach lol

My rating for HGH is BBB+ (Beagle Busy buying) :)

[Snoopy]

While the other Beagle is extremely busy barking loud and very long I have been extremely busy biting over and over again...chunks of shares off the sellers. I wonder which will be the more profitable approach lol

My rating for HGH is BBB+ (Beagle Busy buying) :)


Almost up to $0.5m in HGH shares bought on the market today Beagle. You don't do things in half measures do you?

You are happy with Heartland's lack of liquidity disclosure and the complete secrecy of Covid-19 adjustment specifics (which admittedly I just noticed myself this morning) to keep 'receivables shuffling activity' away from the eyes of the pesky shareholder then? (my post 13809)

SNOOPY

[Beagle]

Almost up to $0.5m in HGH shares bought on the market today Beagle. You don't do things in half measures do you?

You are happy with Heartland's lack of liquidity disclosure and the complete secrecy of Covid-19 adjustment specifics (which admittedly I just noticed myself this morning) to keep 'receivables shuffling activity' away from the eyes of the pesky shareholder then? (my post 13809)

SNOOPY

Good for you mate. I won't talk specific numbers other than to say I think the value is there in spades and have acted accordingly.
I leave you to do the digging on this one mate, my paws are tired from digging elsewhere. A certain amount of faith is required with this provisioning stuff...as I have said many times, provisioning is really just a best guess based on all known information and then smoothed out so that senior executives get their annual bonus's ;)

[Snoopy]

Industry Group Risk

From AR2019 note 22, the greatest 'business group' risk in dollar terms is agriculture, with $741.947m worth of assets. This represents an increase of just $0.281m over the previous year.

$741.947m/ $4,845.570m = 15.3% of all loans

While the size of the agricultural portfolio has barely changed, this significant percentage decrease of the total is due to many more reverse mortgage loans and finance and insurance loans being written.

Indeed reverse mortgage loans, for the first time, are being declared separately as an asset class. $1,318.819m of Reverse Mortgages are declared on the HGH balance sheet. Subsidiary 'Heartland Bank' declares $561.211m of NZ based Reverse Mortgages on the books. That means we can find the size of Heartland's Australian Reverse Mortgage book by simple subtraction:

$1,318.819m - $561.211m = $757.608m

This means that 'Australian Reverse Equity Mortgages' (Aussie REM), if you regard that as a credible loan category, can be thought of as the largest category of 'Account Receivables'

$757.608m/ $4,845.570m = 15.6% of all loans



Regional Risk

From AR2019 note 22, the greatest regional area of credit risk in dollar terms is 'Rest of the North Island' , with $1,214.744m worth of assets. This represents:

$1,214.744.m/ $4,845.570m = 25.1% of all loans

The 'Rest of North Island' loans (which excludes Auckland and Wellington) have risen 8.1% in numerical terms over the year for the second year in a row. (Auckland still covers 23.3% of all loans).

The multi-year picture is shown below:




2012201320142015
2016201720182019


Largest Regional MarketAuckland (30%)Auckland (30%)Auckland (25%)Auckland (26%)
Rest of NI (25%)Rest of NI (26%)
Rest of NI (26%)Rest of NI (25%)


Largest Industry Group MarketAgriculture (24%)Agriculture (21%)Agriculture (16%)Agriculture (17%)
Agriculture (18%)Agriculture (19%)
Agriculture (17%)Aussie REM (16%)



Overall Heartland looks less risky than at any time in its history from a 'Customer Concentration Test' perspective.




Industry Group Risk

From AR2020, the The Australian and New Zealand Standard Industrial Classification (ANZSIC) codes have been used as the basis for categorising customer industry sectors. This means that some of the previously classified loans have been reallocated to different loan categories. This means that what is declared as the same loan category from FY2020 onwards may contain slightly different building blocks to what is ostensibly the same loan category from previous years.

From AR2020 note 22, the greatest 'business group' risk in dollar terms is agriculture, with $625.141m worth of receivables assets. This represents an decrease of $63.948m, or 9.3%, over the restated figure for the previous year. This reduction is primarily driven by a stated intent to gradually reduce the quantum of what are termed 'rural relationship' loans over time.

$625.141m/ $5,211.442m = 12.0% of all loans

Reverse mortgage loans are declared on the balance sheet as a separate asset class within the larger category of 'Households Loans'. $1,538.585m of Reverse Mortgages are declared on the HGH balance sheet. Subsidiary 'Heartland Bank' declares $609.346m of NZ based Reverse Mortgages on the books. That means we can find the size of Heartland's Australian Reverse Mortgage book by simple subtraction:

$1,538.585m - $609.346m = $929.239m

This means that 'Australian Reverse Equity Mortgages' (Aussie REM), if you regard that as a credible loan category on its own, can be thought of as the largest category of 'Account Receivables'

$929.239m/ $5,211.442m = 17.8% of all loans


Regional Risk

From AR2020, Heartland only reports on two regions, 'Australia' and 'New Zealand'. This means information on more targeted regional risk is no longer available, so we cannot readily compare regional risk across previous periods.

From AR2020 note 22, the greatest regional area of credit risk in dollar terms is 'New Zealand', with $3,855.199m worth of assets. This represents:

$3,855.199.m/ $5,211.442m = 74.0% of all loans

Note that the 'Rest of North Island' region in the table below is all the North Island, excluding Auckland and Wellington.

The multi-year picture is tabled below:




2016
2017
2018
2019
2020


Largest Regional Market
Rest of NI (25%)
Rest of NI (26%)
Rest of NI (26%)
Rest of NI (25%)
New Zealand (74%)


Largest Industry Group Market
Agriculture (18%)
Agriculture (19%)
Agriculture (17%)
Aussie REM (16%)
Aussie REM (18%)



Overall Heartland looks to have a lower risk profile that usual from the last five years, judging solely from its 'Customer Concentration Test' perspective. However, with the stated intention to aggressively grow the reverse mortgage business in Australia, I am expecting the 'Customer Concentration Risk' to increase in future years.

SNOOPY

[winner69]

I'm starting to like this creative accounting thing of investing in equities and calling it a quasi bond. Seems to be working okay with GNE and HLG...what could possibly go wrong here lol

a view of a quite a few it seems

When investors start talking like this is it a modern day ‘shoeshine boy’ moment

Interest rates are low for a reason.

Such a strategy might be OK today but one day in the future one will need to quickly implement the good old ‘capital preservation’ plan

[Snoopy]

Updating this number for the full year FY2019 for 'Heartland Group Holdings'. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland AR2019

= $675.668m/ $4,926.404m = 13.7%

The customer loan base (finance receivables) growth year on year (+9.1%) has in relative terms has reversed again and is now growing more rapidly that the company equity (+1.7%). This means the balance sheet has been made 'more stressed' over the year.

The historical picture of this ratio is tabulated below.




FY2012FY2013FY2014FY2015FY2016FY2017
FY2018FY2019
Target


Equity Ratio16.0%14.6%15.0%14.3%14.1%14.1%
14.8%13.7%
-



So Heartland is now more stressed, from an equity ratio perspective, than at any time in its history.


Updating this number for the full year FY2020 for 'Heartland Group Holdings'. The equity ratio is an assessment of the balance sheet risk of the total company, with all finance receivables and the supporting borrowings (whether they be from debenture holders or parent supporting banks) included.

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the 'Heartland Group Holdings' AR2020

= $699.980m/ $5,318.536m = 13.2%

The customer loan base (finance receivables) growth year on year (+9.1%) is growing more rapidly that the company equity (+5.3%). This means the balance sheet has been made 'more stressed' over the year.

If I do the equivalent calculation for 'Heartland Bank'

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the 'Heartland Bank' AR2020

= $597.037m/ $4,314.159m = 13.8%

The historical picture of these ratios is tabulated below.




FY2016
FY2017
FY2018
FY2019
FY2020
Target


'Listed Heartland' Equity Ratio
14.1%
14.1%
14.8%
13.7%
13.2%
-


Heartland Bank Equity Ratio


14.8%
14.6%
13.8%
-



So the listed Heartland is now more stressed, from an equity ratio perspective, than at any time in its history. This isn't a total surprise. When all of Heartland's operations were included within 'Heartland Bank', RBNZ expressed concern about the Australian operations in particular having the potential to upset the risk balance of what was ostensibly a New Zealand bank. This is what precipitated a Heartland restructure with the separation of the Australian Reverse Mortgage business in particular from Heartland Bank. The listed entity you could buy on the market changed from 'Heartland Bank' to the new all enveloping 'Heartland Group Holdings'. The corporate restructure was completed in October 2018. This meant the consequential change in capital position was reflected in the reporting years of FY2019 onwards. Nevertheless, if all this restructuring is disregarded, even the now subsidiary 'Heartland Bank' is still in its weakest equity ratio position on record. This is not a problem yet, but the trend needs watching.

SNOOPY

[Beagle]

It’s a danger when long time sensible intellectual investors like Beagle start talking like this .....almost a modern day ‘shoeshine boy’ moment

Interest rates are low for a reason.

Such a strategy might be OK today but one day in the future one will need to quickly implement the good old ‘capital preservation’ plan

It was intended as a tongue in cheek post.

[winner69]

It was intended as a tongue in cheek post.

Apologies

I have edited my post to make it of more general nature

[Snoopy]

a view of a quite a few it seems

When investors start talking like this is it a modern day ‘shoeshine boy’ moment

Interest rates are low for a reason.

Such a strategy might be OK today but one day in the future one will need to quickly implement the good old ‘capital preservation’ plan


You are advocating an alternative of buying bonds with interest rates at all time lows as a capital preservation strategy? Or alternatively putting your money in the bank in a term deposit that will take a haircut in a serious downturn because NZ is one of the few countries where bank deposits are not insured and so not capital guaranteed?

SNOOPY

[Beagle]

Yes I was going to make a comment regarding equities and the conundrum of TRINA (There really is no alternative to equities). I have had significant fixed interest investments mature in the last few weeks and more next week and have been busy adding too and buying a number of quality companies and I haven't finished yet by any means. There really is no alternative with interest and bond rates where they are today.

[winner69]

You are advocating an alternative of buying bonds with interest rates at all time lows as a capital preservation strategy? Or alternatively putting your money in the bank in a term deposit that will take a haircut in a serious downturn because NZ is one of the few countries where bank deposits are not insured and so not capital guaranteed?

SNOOPY

No Snoops

The 'capital preservation' trick sometime in the future is using the liquidity of the equity markets to sell up the once high yielding shares when the share price inevitably starts to fall

[Snoopy]

The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.

According to the full year (FY2019) statement of financial position the debt excluding borrowings is:

$22.498m + $7.532m + $10.372m = $40.402m (1)

-----

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:

$4,926.404m - ($3,029.231m +$1,318.819m + $11.132m + $354.928m) = $212.294m

We are then asked to remove the intangible assets from the equation as well:

$212.294m - $72.679m = $139.615m (2)

----


Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:

$40.402m/$139.615m= 28.9% < 90%

Result: PASS TEST

The historical picture of this ratio is tabulated below.




FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
Target

[
Underlying Gearing Ratio
20.2%
14.7%
40.5%
58.4%
37.4%
37.6%
39.4%
28.9%
< 90%





The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.

According to the full year (FY2020) statement of financial position the debt excluding borrowings:

$36.262m + $12.303m + $17.012m + $20.456m = $86.033m (1)

-----

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:

$5,318.136m - ($3,045.195m +$1,538.685m + $11.132m + $413.340m) = $309.784m

We are then asked to remove the intangible assets from the equation as well:

$309.784m - $72.813m = $236.971m (2)

----


Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:

$86.033m/$236.971m= 36.3% < 90%

Result: PASS TEST

The historical picture of this ratio is tabulated below.




FY2016
FY2017
FY2018
FY2019
FY2020
Target

[
Underlying Gearing Ratio
37.4%
37.6%
39.4%
28.9%
36.3%
< 90%



SNOOPY

[Snoopy]

This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2019:

The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $334.330m - $85.589m= $248.741m

Interest expense is listed as $136.747m.

So (EBIT)/(Interest Expense)= ($248.741m)/($136.747m)= 1.82 > 1.20

Result: PASS TEST

The historical picture of this ratio is tabulated below. It looks to be getting better and better.



FY2012FY2013FY2014FY2015FY2016
FY2017
FY2018FY2019
Target

[
EBIT/ Interest Expense1.151.221.441.521.651.791.821.82
>1.2





This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2020:

The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $346.802m - $106.794m= $240.008m

Interest expense is listed as $130.129m.

So (EBIT)/(Interest Expense)= ($240.008m)/($130.129m)= 1.84 > 1.20

Result: PASS TEST

The historical picture of this ratio is tabulated below. It looks to be getting better and better.




FY2016
FY2017
FY2018
FY2019
FY2020
Target

[
EBIT/ Interest Expense
1.65
1.79
1.82
1.82
1.84
>1.2



This is turning into a very solid picture of ever improving interest cost cover over the years,

Working Note

A thought did cross my mind that, with the adoption of IFRS16, I should adjust my calculation this year. IFRS16 has caused the 'operating expenses' that I have used above to decrease. This is because what was last year a straightforward 'tax deductible lease payment' has been removed from the expenses and replaced with:

1/ An extra depreciation charge on an IFRS16 created 'Right to Occupy' asset. (Found under Note 6 to be $2.324m}
2/ An extra interest charge on the 'IFRS16 created', and 'Right to Occupy asset offsetting' 'Capitalised Lease Contract' liability. (I can't find this. Is it subsumed in Note 3, 'Interest Expense', 'Other Borrowings' of $35.888m? )

I feel inclined to add that 'Right to Occupy' Asset depreciation (1/ above) back onto the operating expenses (effectively lowering the EBIT I have estimated) , and make an adjustment -downwards- on the interest expense denominator in my ratio calculation by taking into account 2/. But should I do this? I feel it will take a real accountant to answer that question!

SNOOPY

[Ferg]

Hi Snoopy

Interest on right to use lease liabilities is at the bottom of page 38 of $570k. I think that is what you are seeking.

Regarding how to treat this, options:
1) forever adjust to how it used to be based on sensible pre-IFRS16 accounting per your suggested replacements;
2) do not adjust in future but instead adjust prior year numbers, or
3) use the raw numbers as is, with a footnote noting the change in methodology.

Option 2 may not be possible given the lack of data.


Option 3 is easiest. If you use Option 3 it might be worth noting the impact on the ratio - it may not be material - my back of the fag packet suggests the ratio of 1.84 becomes maybe 1.85.

Option 1: adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct. An alternative is that it sits under operating expenses given it is not related to lending but I cannot see any reference to how it is treated. FYI I believe the payments on these leases were $2,005k per page 9 which would be the "lease expense" using the old methodology (prior year was 1,807k per page 21). This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year.

I trust that helps.

[Snoopy]

Hi Snoopy

Interest on right to use lease liabilities is at the bottom of page 38 of $570k. I think that is what you are seeking.

Regarding how to treat this, options:
1) forever adjust to how it used to be based on sensible pre-IFRS16 accounting per your suggested replacements;
2) do not adjust in future but instead adjust prior year numbers, or
3) use the raw numbers as is, with a footnote noting the change in methodology.

Option 2 may not be possible given the lack of data.


Option 3 is easiest. If you use Option 3 it might be worth noting the impact on the ratio - it may not be material - my back of the fag packet suggests the ratio of 1.84 becomes maybe 1.85.

Option 1: adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct. An alternative is that it sits under operating expenses given it is not related to lending but I cannot see any reference to how it is treated. FYI I believe the payments on these leases were $2,005k per page 9 which would be the "lease expense" using the old methodology (prior year was 1,807k per page 21). This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year.

I trust that helps.


Thanks for your work on this Ferg. I am heartened by your back of fag packet calculation that shows this 'issue' I am concerned with only affects the second decimal place of single digit result of the ratio I am looking at. However, as I am sure you are aware, there are other businesses with relatively large leased asset portfolios where IFRS16 makes a huge difference to the published accounts. So I hope you don't mind if I try to increase my understanding on this IFRS16 matter, using Heartland as an example.

I think I am correct in saying IFRS16 is all about reporting what has happened. As far as anyone at an operational level, paying the bills on a day to day basis in any of these IFRS16 affected companies: Nothing has changed.


You say:

"Adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct"

When talking about the 'interest on the right of use assets' of $570k being part of the $130,129m of interest expense, I would say this is beyond doubt. If this were not so, it would mean that the 'interest expense' total would not include all interest expended! That would seem to be an untenable reporting position.

But here is where my interpretation of the situation becomes a little wobbly. If I am correct in my assertion that 'nothing operationally has changed', where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from? Pre IFRS16, the company just paid the appropriate operating lease expenses every year and they appeared on the books as one of many annual expenses. There was no 'interest to be paid' on this operating lease expense - was there? It seems to me like this extra $570k of interest bill has materialized out of nothing. How can this be?

You say

"This value of $2,005 (the payment of lease liabilities in the Consolidated Statement of Cashflows) also reconciles with the movement in the lease liabilities & right to use assets year on year."

But if you:

1/ Take the 'Depreciation of Right of Use Assets' figure of under Note 18 'Other Balance Sheet Items' of $2.324m at face value AND
2/ Try to adjust that by adding in the extra $570k of new interest expenses on the finance lease then it doesn't reconcile: $2,324m + $570m = $2,894m.

In fact the two comparative totals are 44% out. How do you explain that?

SNOOPY

[Ferg]

Here are my workings supporting my statement "This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year":



HGH Lease Liabilities - Old Method

















A) Pay Lease
Debit

Credit

Source
Notes



Lease Expense P&L
2,005



p9
Last year $1,807 p21



Bank Account


2,005















HGH Lease Liabilities - New Method

















B) Lease Liability Position
Debit

Credit

Source
Notes


1/7/19
ROU Asset
10,728



p13, p38



Deferred Tax Asset
274



p13 says $0.3m



Retained Earnings Adj.
751



p7, p13




Lease Liability


11,753

p12













C) 2020 New Leases









ROU Asset
9,958



p8




Adj. (DTA/RE?)
180



?
part of $256 per p26?



Lease Liability


10,138

derived - see reconciliation below












D) 2020 Payments









Lease Liability
2,005



assumed



Bank Account


2,005

p9













E) 2020 Interest









Interest on Leases P&L
570



p38




Lease Liability


570

assumed












F) 2020 Depreciation









Depreciation P&L
2,324



p38




ROU Asset


2,324

p38













Reconciliations:


















ROU Assets:









Opening Balance
10,728



p13, p38



Add New Leases
9,958



p38




Less Depreciation
-2,324



p38




Closing Balance
18,362



p8, p38













ROU Liabilities:









Opening Balance
11,753



p12, p13



Add New Leases
10,138



derived




Less Payments
-2,005



p9




Add Interest
570



p38




Closing Balance
20,456



p8, p38

[sb9]

Got my DRIP shares allocated this morning at $ 1.24695055 a piece, very happy :t_up:

[winner69]

Got my DRIP shares allocated this morning at $ 1.24695055 a piece, very happy :t_up:

Effectively probably didn't get shares at 1.24695055 as you generally lose out on the roundings when they calculate the number of shares

[peat]

Effectively probably didn't get shares at 1.24695055 as you generally lose out on the roundings when they calculate the number of shares

a total joy germ today aren't you?
some remainders on various companies get given to charity I believe

[winner69]

a total joy germ today aren't you?
some remainders on various companies get given to charity I believe

...and some carry the roundings (shortfall) over and catch up at a later date

Just saying ....happy as today ...so happy going to mow the neighbours lawns

[nevchev]

Got my DRIP shares allocated this morning at $ 1.24695055 a piece, very happy :t_up:
No divy payment in my bank account as yet so plan to go xmas shopping today on hold.Should have gone for drp but had no correspondence from them to remind me😖

[thegreatestben]

Don't seem to get offered the DRP via sharesies.

[peat]

Don't seem to get offered the DRP via sharesies.

well you can just buy your odd lot

[thegreatestben]

well you can just buy your 3.27681 shares cant you?

I think $1,176.92 buys a few more than that :p

[RTM]

Just received a very special offer from Heartland...

"Your exclusive Heartland Bank Direct Call Account offer:

earn an additional 0.20% p.a. on any new Heartland Direct Call Account until 31 December 2020
current interest rate, including shareholder premium, will be 0.95% p.a.
plus, one lucky shareholder will win a $2,000 New Zealand travel voucher
no minimum deposit and $5m maximum deposit
see the email footer for the link to the full T&Cs.
To take up this offer and enter to win the travel voucher, open a Direct Call Account in the Heartland Mobile App using the promo code HGH20 before 31 December 2020. I"

Can hardly wait to take it up.

RTM

[Grimy]

No divy payment in my bank account as yet so plan to go xmas shopping today on hold.Should have gone for drp but had no correspondence from them to remind me��

It has just shown up in my account (my divy-not yours.....).

[thegreatestben]

Yup got mine too

[Snoopy]

Wow, Ferg what can I say? I nominate your post for 'pointy head post of the year', Even I can't compete with a post like that! However, although it may go over the heads of many, I have read your post from start to finish to try and get the answer to my question(s). For those that have forgotten, I wanted to know how a simple two line entry under the old accounting standard....





HGH Lease Liabilities - Old Method

















A) Pay Lease
Debit

Credit

Source
Notes



Lease Expense P&L
2,005



p9
Last year $1,807 p21



Bank Account


2,005


















....turned into a whole page of entries that had be be worked on under the new IFRS16 regime. The first question I have is in regard to the balance sheet implications below.





HGH Lease Liabilities - New Method

















B) Lease Liability Position
Debit

Credit

Source
Notes


1/7/19
ROU Asset
10,728



p13, p38



Deferred Tax Asset
274



p13 says $0.3m



Retained Earnings Adj.
751



p7, p13




Lease Liability


11,753

p12





Now I don't know the ins and outs of every detail of converting from the old standard to the new standard. But am I correct in saying that the $0.751m 'balance sheet adjustment to retained earnings' (see quoted text above) is a 'one off' that won't have to be repeated 'in kind' in coming years? Has the $0.751m capital change effectively been added as a 'fudge factor' to make sure the 'Right of Use Assets' balance sheet entry (that did not exist before) is exactly balanced by the 'lease liabilities" (which did exist before, but which has not been represented on the balance sheet up to now)? I have been puzzled why the 'Right of Use Assets' did not -automatically- equal the 'Lease Liabilities' without any fudging. But if there will be no more fudging happening in the future, perhaps I have nothing to worry about?

Before the adoption of IFRS16 there were two kinds of lease contracts that were recognised separately, directly or indirectly, in the financial statements. 'Finance leases' were assets that Heartland would take over the ownership of at the end of the lease contract. 'Operating leases' were rental agreements where ownership of the assets were retained by the lessor. The 'finance lease' assets were always on the books of Heartland because they were contracted in such a way that it was clear that Heartland would end up owning these assets. OTOH the 'operating lease assets', while critical to the operations of Heartland's business, were never on the books at all. Of the very large lump of new assets recognised for FY2020,, $9.958m (p38 of Annual Accounts for FY2020 AND your reconciliation below Ferg) are very likely almost entirely previously classified 'operational assets'. Assets now being brought onto the books at Heartland for the first time.





Reconciliations:


















ROU Assets:









Opening Balance
10,728



p13, p38



Add New Leases
9,958



p38




Less Depreciation
-2,324



p38




Closing Balance
18,362



p8, p38















If we now move to the reconciliation of the liabilities.....





Reconciliations:








ROU Liabilities:









Opening Balance
11,753



p12, p13



Add New Leases
10,138



derived




Less Payments
-2,005



p9




Add Interest
570



p38




Closing Balance
20,456



p8, p38





.....the actual cash payment that was made of $2.005m (remember that was the only number we had to worry about under the old standard) is in there (highlighted in bold). However, I am none the wiser on my previous post question

"Where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from?"

From your reconciliation of liabilities you are indicating this $570k of interest is accumulating and not being paid (?) Could this be interest that is accumulating as part of the finance lease portfolio? That doesn't sound right, as if true it would have accumulated under the old standard as well. But I will have to leave things there. It is late and my brain is starting to hurt!

SNOOPY

[Snow Leopard]

Effectively probably didn't get shares at 1.24695055 as you generally lose out on the roundings when they calculate the number of shares

I actually got mine at a discounted price of $1.24693456 each, probably some sort of loyalty bonus for long time holders :mellow:

[Ferg]

Wow, Ferg what can I say? I nominate your post for 'pointy head post of the year', Even I can't compete with a post like that!

Cheers - although I'm not sure if such a nomination is a good or a bad thing! :)


However, although it may go over the heads of many, I have read your post from start to finish to try and get the answer to my question. For those that have forgotten I wanted to know how a simple two line entry under the old accounting standard turned into a whole page of entries that had be be worked on under the new IFRS16 regime.

My post highlights the absurdity of IFRS16. All the more reason to support why I left the profession years ago. This sort of nonsense shows why the industry is broken. IMO it has been captured by the likes of US merchant bankers & private equity firms, and not for the better.


The first question I have is in regard to the balance sheet implications below. Now I don't know the ins and outs of every detail of converting from the old standard to the new standard. But am I correct in saying that the $0.751m 'balance sheet adjustment to retained earnings' above is a one off? Has the $0.751m capital change effectively been added as a 'fudge factor' to make sure the 'Right of Use Assets' (that did not exist before) is exactly balanced by the 'lease liabilities" (which did exist before, but they have not been represented on the balance sheet up to now)?

I have been puzzled why the 'Right of Use Assets' did not automatically equal the 'Lease Liabilities'.

A good question which, sadly, forced me to read up on IFRS16. I too assumed the ROU asset would equal the liability at inception...until I read a PWC guide on it. The liability is calculated using the net present value of future cash flows which is pretty standard stuff. But here comes the interesting part, although IFRS16 can never be described as interesting of itself,...

The ROU asset is the ROU liability plus and minus a bunch of adjustments. Quote from PWC : "the right-of-use asset is initially recognised at the commencement day and measured at cost, consisting of the amount of the initial measurement of the lease liability, plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, the initial estimate of restoration costs and any initial direct costs incurred by the lessee." (bold emphasis added by me). Source = p10 of https://www.pwc.com/pg/en/publications/ifrs-news/in-depth-ifrs16.pdf

Given the ROU asset for HGH is less than the liability then a deduction has been made - quite possibly a lease incentive or inducement that was paid in advance to HGH, hence the deduction would be in accordance with the bold section. Given this was pushed into retained earnings it suggests it is reversing income that has previously been recognised in the P&L and so yes it is a one off. Note the deferred tax component is circa 28% of the gross value ($751k + $274k) * 28% = $287k (which is close to the $274k deferred tax adjustment). I'm no expert on deferred tax but to me this also suggests there has been an impact on the P&L previously. Alternatively, it could be a deduction was made for either estimated restoration costs or direct costs incurred by HGH. Either way it is a one off adjustment to retained earnings on inception. Notice the other new lease also had a deduction of sorts - I tagged the balancing line of $180k with Adj. (DTA/RE?) so it appears the new lease they included also had some sort of one off deduction. Edit : on reflection this could be a deduction for contracted future restoration of premises.

Late update:


the actual cash payment that was made of $2.005m (remember that was the only number we had to worry about under the old standard) is in there. However, I am none the wiser on my previous post question

"Where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from?"

From your reconciliation of liabilities you are indicating this $570k of interest is accumulating and not being paid. Could this be interest that is accumulating as part of the finance lease portfolio?

HGH are required to disclose the derived interest cost of the lease payments per IFRS16. I assumed the payment of $2,005k that was disclosed in the cash flow included $570k interest. If it is included then the principal component of the ROU liability payment is $2,005k - $570k = $1,435k. Rather than introduce this new number on the reconciliation I showed both numbers given it has the same effect. But this does not imply the interest component is not being paid.

However (and this is where my brain starts to hurt) further reading of IFRS16 suggests the payment of the interest component is shown separately from the principal component of the lease payment in the cash flow. If that is the case, then IFRS16 is truly broken and that would suggest the total lease payments were $2,005k + $570k = $2,575k which is a lot higher than last year (and does not seem right). If that is the case then the $570k deduction is to be removed from the liability reconciliation and the derived figure amended accordingly. To add further complication to the liability reconciliation, any revaluation of the lease liability due to a changing discount factor would also impact upon the liability balance.

[teabag]

Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?

[BWH]

Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?

My e-mail with the dividend details came through at 9.19pm!

[BlackPeter]

Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?

You are not too quick, but ways to impatient :p; What exactly is the rush and excitement?

I have not yet seen allocated shares disappearing ... and do this sort of book keeping normally once a month. If you wait long enough all your statements of accounts will magically show up. The link accounts typically arrive once per week (if there was a change).

[winner69]

Heartland App is useless

Amazing rates shown ....3% pa and 4% for term deposits ...and they come up when you try to do a TD

Pretty slack ...esp for Fintech company

[Baa_Baa]

Heartland App is useless

Amazing rates shown ....3% pa and 4% for term deposits ...and they come up when you try to do a TD

Pretty slack ...esp for Fintech company

Are they even up to date? Got this email (abridged) to shareholders yesterday afternoon.

12004

[winner69]

Are they even up to date? Got this email (abridged) to shareholders yesterday afternoon.

12004

I was trying to test if you already have a Direct Call Account whether you can open another NEW one to get the .2% extra

Think I blew the system up :p:t_up:

[Soolaimon]

I was going to call them on Monday with that question.

[teabag]

I was going to call them on Monday with that question.

If you do, please advise the answer here, was wondering that myself.

[Kelvin]

Hi all, I successfully opened a 2nd Direct Call account with the shareholder special. Went through the mobile app

[Soolaimon]

Actually, I am wondering if it is worth the trouble for 2 .5 months at .2% extra. Cause the way I understand it will revert back to .75% 1st Jan.

[winner69]

Actually, I am wondering if it is worth the trouble for 2 .5 months at .2% extra. Cause the way I understand it will revert back to .75% 1st Jan.

The 0.2% is a premium to the current rate

If Heartland decide to change the 0.75% next week to say 0.5% you’ll only be getting 0.7% from the date of any change

And the Dec 31 is when the offer ends ...open by then and you get the premium (for as long as they take it away)

That’s how I read it anyway

[Snoopy]

Cheers - although I'm not sure if such a nomination is a good or a bad thing! :)


If it's any consolation, I've been sharpening the point on my own head this weekend.



Snoopy wrote
"I have been puzzled why the 'Right of Use Assets' did not automatically equal the 'Lease Liabilities' "

A good question which, sadly, forced me to read up on IFRS16. I too assumed the ROU asset would equal the liability at inception...until I read a PWC guide on it. The liability is calculated using the net present value of future cash flows which is pretty standard stuff. But here comes the interesting part, although IFRS16 can never be described as interesting of itself,...

The ROU asset is the ROU liability plus and minus a bunch of adjustments. Quote from PWC : "the right-of-use asset is initially recognised at the commencement day and measured at cost, consisting of the amount of the initial measurement of the lease liability, plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, the initial estimate of restoration costs and any initial direct costs incurred by the lessee." (bold emphasis added by me). Source = p10 of https://www.pwc.com/pg/en/publications/ifrs-news/in-depth-ifrs16.pdf


Ah that clears up a lot, thanks. Knowing that the 'Right of Use Assets' did not automatically equal the 'Lease Liabilities' lead me to think that the discounting of future lease payments would mean that the 'Right of Use' assets would always exceed the 'Lease Liabilities', on paper, on balance date. So I was extra surprised to see that the reverse was true in the Heartland case. I know about the ubiquity of 'lease incentives' to get tenants to sign up. But I hadn't considered that such arrangements are probably now the norm rather than anything unusual. Nor had I considered how much equivalent 'forgiven rent' these deals represent.

I started reading that IFRS16 PWC wrap up you posted as part of my weekend 'head sharpening' to improve pointiness. From page 1

"IFRS 16 will also influence the income statement, because an entity now has to recognise interest expense on the lease liability (obligation to make lease payments) and depreciation on the ‘right-of-use’ asset (that is, the asset that reflects the right to use the leased asset)."

That seems very odd jargon. I would call paying off some of my lease liability a 'lease payment' or a 'lease installment payment'. Calling it an "interest expense on the lease liability" has quite a different connotation to me. Can 'paying your rent' really be described as 'paying a class of interest'? I find that very confusing.

Later on p1 another surprising comment.

"The new guidance will also change the cash flow statement. Lease payments that relate to contracts that have previously been classified as operating leases are no longer presented as operating cash flows in full. Only the part of the lease payments that reflects interest on the lease liability can be presented as an operating cash flow (depending on the entity’s accounting policy regarding interest payments). Cash payments for the principal portion of the lease liability are classified within financing activities."

Now I get the idea of a 'finance lease' where your company might buy a car (for example) and expect to gain ownership of it at the end of the 'finance lease'. The treatment of a finance lease does not change under IFRS16 because the car, in this instance, is on the company's books that are using that car all along. Such a finance lease would have both an interest and capital repayment component. But what the paragraph I quote above above seems to be saying is that an 'operating lease' also has a capital and an interest repayment component. Huh? I thought the whole definition of an 'operating lease' as distinct from a 'finance lease' implied that the company that used the asset, like a rental premises, never intended to own it. So I had a clear expectation that capital repayments played no part in any operating lease contracts. It appears my understanding of lease matters is very poor! Can anyone sort me out?

TIA

SNOOPY

[winner69]

Snoops -have you caught up that in response to the COVID-19 pandemic the International Accounting Standards Board has issued amendments to IFRS 16
Leases to allow lessees not to account for rent concessions as lease modifications if they are a direct consequence of COVID-
19 and meet certain conditions.

Maybe that complicated matters as well

[Soolaimon]

I called them this morning and can confirm that the offer only applies to new accounts and the 0.2% premium expires 31 Dec. I guess if one had a mil or so it would be worth the effort, otherwise.....

[Greekwatchdog]

New Mortgage Rates...

https://www.nzx.com/announcements/361329

[Norwest]

Wow, they are amazingly good value mortgage rates.

[sb9]

Jeff sounds pretty excited..

https://www.interest.co.nz/personal-finance/107484/another-challenger-bank-has-launched-even-lower-home-loan-rate-offers-today

“Digitalisation means a low cost of onboarding, which can be passed on to borrowers. It also means speed – an answer can be given in minutes, so customers don’t have to endure the lengthy processes of mainstream banks. Moreover, Heartland’s group structure provides it with broad funding flexibility,” said Heartland Group CEO Jeff Greenslade.

[Greekwatchdog]

I wonder if the shareholders of Kiwibank have ever considered buying Heartland...

[calledone]

I'd move my ASB home loan to Heartland if it was not locked in for 2 more years but really considering moving my saving from kiwibank to them. In the meantime maybe I should just keep accumulating HGH shares.

[winner69]

Heartland making the news big time today

[thegreatestben]

I'm subdividing/building, too bad Heartland don't finance new builds :(

[Beagle]

Heartland making the news big time today

https://www.nzherald.co.nz/business/heartland-bank-releases-nzs-first-sub-2-per-cent-mortgage-rate/KM5M7AQIFS7DGAANIAHO46WWSU/

I honestly never thought I would see the day you could borrow money at 1.99% !

[Cyclical]

If nothing else, it's a neat bit of publicity for HGH to be the first to go sub 2%. They've tended to have relatively good TD rates until recently haven't they? I guess that's going to change, if it hasn't already.

[winner69]

https://www.nzherald.co.nz/business/heartland-bank-releases-nzs-first-sub-2-per-cent-mortgage-rate/KM5M7AQIFS7DGAANIAHO46WWSU/

I honestly never thought I would see the day you could borrow money at 1.99% !

Didn’t your dad give you a 0% loan once ;)

[Cyclical]

Jeff sounds pretty excited..

https://www.interest.co.nz/personal-finance/107484/another-challenger-bank-has-launched-even-lower-home-loan-rate-offers-today

“Digitalisation means a low cost of onboarding, which can be passed on to borrowers. It also means speed – an answer can be given in minutes, so customers don’t have to endure the lengthy processes of mainstream banks. Moreover, Heartland’s group structure provides it with broad funding flexibility,” said Heartland Group CEO Jeff Greenslade.

Gosh there are some lightweight comments at the end of that article, such as "A bit of a sham Heartland is..." probably because the Heartland offer doesn't necessarily conform to that posters specific (likely riskier) requirements.

[Jim]

How the hell Heartland going to make any money ???

[Cyclical]

“Digitalisation means a low cost of onboarding, which can be passed on to borrowers. It also means speed – an answer can be given in minutes, so customers don’t have to endure the lengthy processes of mainstream banks. Moreover, Heartland’s group structure provides it with broad funding flexibility,” said Heartland Group CEO Jeff Greenslade.

I wonder if this was somehow developed or driven off the back of the very efficient Harmony digital platform? If so and they truly have found significant cost savings because of it, it could really be quite successful for HGH and disruptive for the industry as a whole...anything to stem the flow of billions in profits to Oz banks has to be a good thing.

[Waltzing]

"How the hell Heartland going to make any money ???"

classic , im sure our grandparents would be thinking Deja Vu.

A retired teacher aged 87 simply said "here we go again"

[Snoopy]

How the hell Heartland going to make any money ???

Easy:



Market Leading Mortgage Interest Rate1.99%


less Market Leading Bank Interest Margin3.99%


equals Future Term Deposit Rate for Heartland Term Deposit Customers-2.0%



SNOOPY

[nztx]

"How the hell Heartland going to make any money ???"

classic , im sure our grandparents would be thinking Deja Vu.

A retired teacher aged 87 simply said "here we go again"




Just ask Grunter Robertson -- creating the fluid stuff seems no problem to pull out of tomorrow's mythical hat .. ;)

[Beagle]

Easy:



Market Leading Mortgage Interest Rate1.99%


less Market Leading Bank Interest Margin3.99%


equals Future Term Deposit Rate for Heartland Term Deposit Customers-2.0%



SNOOPY

No we can't have such flippant barking mate. I have taken it upon myself to do something about marketing these new mortgages as you can see ;) https://www.heartland.co.nz/

https://tmmonline.nz/article/976517637/q-a-why-heartland-launched-a-sub-2-rate?utm_source=GR&utm_medium=email&utm_campaign=Why+Heartland+launched+a+sub+2%25+rat e+%E2%80%94%C2%A0the+lowest+ever+in+NZ

[thegreatestben]

Still can't figure out why my applications get denied, I'm an easy tick on every single condition.
Only thoughts are I'm not borrowing enough?



a NZ citizen or permanent resident, over 18 years old - TICK
looking for a home and have a 20% deposit, or already owning a home and have at least 20% equity - TICK
planning to live or currently living in the property - TICK
able to meet the repayments over the requested loan term from your salary or wages - TICK
a standalone, single section house that is freehold, cross lease or on a unit title - TICK
owned or purchased either joint or individually (not in a trust or company). - TICK
located in a major centre - TICK

[Leftfield]

Still can't figure out why my applications get denied, I'm an easy tick on every single condition.
Only thoughts are I'm not borrowing enough?

Suggest you take it up with HGH and let us know how you get on.

[BlackPeter]

https://www.nzherald.co.nz/business/heartland-bank-releases-nzs-first-sub-2-per-cent-mortgage-rate/KM5M7AQIFS7DGAANIAHO46WWSU/

I honestly never thought I would see the day you could borrow money at 1.99% !

Actually - our son back in Germany managed already several years ago to get a ten year fixed term mortgage for his house ... with a 0.95% interest rate. New Zealand interest rates are just outrageously dear, even at 1.99% they still are :)!

[Beagle]

Who remembers "Spot" the Telecom Jack Russell terrier ? Little refresher here https://www.nzonscreen.com/title/spot-telecom-commercials-1991
I've decided that for a small fee I will offer my Beagle services for more advertisements for HGH, (but I'm not jumping into any swimming pools and I can't promise not to eat any tasty pies lying around)

Now as silly as all this sounds...actually SPOT the telecom dog was a phenomenal marketing success for Telecom back in the day starring in 43 different commercials.

Wonder if HGH will follow suit with that Beagle ? Seems to be doing good for the share price already :)

What HGH need is a good sharp punchy name for their Beagle that really gets the message across. I think that name should be Buck, (apologies to the "Call of the Wild" producers, itself a great movie but I digress). Buck the Beagle could feature in their home equity release video's. A nice looking couple with their lovely Beagle...stay in your own home and enjoy Buck and all the comforts and benefits that confers :)

[Beat the Bank]

I was trying to test if you already have a Direct Call Account whether you can open another NEW one to get the .2% extra


I approached them and they gave me the extra as I already had accounts and the app. So worth the try other loyal customers/shareholders

[Snoopy]

The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

<SNIP>



If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.



The problem is that -this year- we cannot do this, because Heartland has provided no information on the maturity profile of loans coming due in the FY2021 financial year. I contend that this means the information supplied on liquidity in this years financial report is a joke. Measuring liquidity is a complex exercise done by comparing expected (not contracted ) cash inflows from maturing receivables loans to expected (not contracted) cash outflows from repaying debenture holders. This I understand. But to provide no information at all on maturing receivables means that measuring liquidity on a short term (or any term) basis is actually impossible.

I am at a loss to explain what Heartland are trying to achieve by only disclosing one half of their liquidity story. I think the level of disclosure under Note 23 in the FY2020 accounts is woefully inadequate. When information is withheld that has historically been disclosed, it always begs the question, what are Heartland trying to hide?

I see that in Note 1 of the accounts Heartland says:

"The Group has responded to the pandemic by working with its customers to understand their needs and provide them with the financial support that best meets their requirements. To date, that support has included participating in industry wide measures (such as the mortgage deferrals programme and the provision of liquidity under the Business Finance Guarantee Scheme (BFGS) program), and implementing other measures such as temporary payment reduction or payment deferral arrangements for both business and consumer customers. The Group has also developed a product, Heartland Extend, which provides customers with flexible payment options."


The Heartland Group NZX/ASX annual announcement of 17th September contains useful information as to how Heartland plans to manage liquidity.

From p3

"Most of Heartland’s customers have returned to pre-COVID-19 payment schedules. At 27 August 2020, 96% of Consumer loans and 98% of SME and Business loans were on usual (or pre-COVID-19) repayment schedules or had taken up Heartland Extend."

If we regard "Consumer Loans" as "Harmoney NZ", "Harmoney AU" and "Personal Loans" that adds to be a total of: $146m+ $54m+ $12m = $212m. So the amount of loans 'not on schedule' were:

0.04 x $212m = $8.5m

If we regard "SME and Business loans" as "Open for Business", "Business Intermediated" and "Business Relationship" that adds to a total of: $155m+$499m+$496m = $1,150m So the amount of loans 'not on schedule' were:

0.02 x $1,150m = $23m

Added together this is nearly 40% of forecast FY2021 profit. So despite the small percentages, we are not talking about trivial money. And remember these repayment wobbles do not include 'Heartland Extend', which are really debt payments temporarily forgiven because it is judged they will 'come right'.

Specifically on the subject of liquidity from p11:

"Heartland Bank’s focus is on the reduction of risk concentrations in its deposit book and shifting its deposit mix in favour of lower rate call deposits where Heartland is relatively underweight."

"risk concentrations in its deposit book" is an interesting phrase. This implies Heartland are concerned that the term deposits that Heartland are attracting do not match the terms on which Heartland wishes to on loan that money. In an interesting quirk of human behaviour, "call" accounts are actually quite sticky as most call depositors leave their money in those accounts for an extended period of time. So I read the Heartland quote as saying that they are looking to extend the length of the average term deposit.

"A strategy to shift funding away from short-term uncommitted sources in favour of committed wholesale lines." means that Heartland are looking towards giving certainty to their loan book by selling off 'chapters of the total loan book 'in the form of securitized loan packages (collections of "in kind loans" on sold to a buyer that has the capital resources to fund a loan 'chapter', but where Heartland offers a capital guarantee to the loan 'chapter' buyer).

"The innovative Australian reverse mortgage-backed syndicated loan securitisation transaction announced on 15 September 2020 (for $A142m) is funded by established offshore institutional investors. The first-of-its-kind transaction achieves another milestone in executing Heartland’s strategy to diversify type, source and tenor of its Australian funding and importantly evidences market liquidity to existing warehouse funders".

The Australian Reverse mortgage book $NZ957.5m at balance date. If you take as a conservative requirement that Heartland should hold 20% of the capital it loans out then the $142m new loan provides sufficient liquidity to cover a loans receivable balance of: $A142m / 0.2 = $A710m. I think that new loan facility is close to covering the entire Australian REM loan portfolio on its own., which combined with the already existing facilities:

"Other funding activity included:•execution and utilization of a new A$250 million reverse mortgage funding warehouse provided by a major Australian financial institution
•issuance of A$100 million new Medium Term Notes."

provides plenty of headroom for the growth of the Australian REM loan portfolio into the future.

But something is missing from this discussion. There are no estimate being released on the 'demand' side of loans going forwards. It is all very well signing up depositors willing to give you capital to loan out. But what if there are not enough people and businesses on the other side of the ledger that want money? Heartland would then have a lot of money to pay out in debenture interest without the corresponding income stream from the loan capital that would normally service that debt. This is the only year that Heartland has not mentioned the maturity profile of their 'account receivables' and that to me is a worry.

SNOOPY

[trader_jackson]

Forsyth this morning saying HGH overvalued - 12 month price target of $1.35...

[King1212]

Come on TJ Frosyth broker is a crook .....can not be trusted...and everyone knows...

[Beagle]

Forsyth this morning saying HGH overvalued - 12 month price target of $1.35...

I've seen the report and couldn't disagree with it more. The company itself is forecasting $84m at the mid point of their forecast range which translates to earnings of 14.3 cps and yet Forbar are only estimating 10.5 cps, claiming we are in the heart of the storm. The average analyst view of market screener is here and shows earnings for FY21 or 13 cps rising to 14 and 15 cps in the following years. https://www.marketscreener.com/quote/stock/HEARTLAND-GROUP-HOLDINGS-47041144/financials/

Rather than me make aspersions on their analysts work I would rather simply highlight that its at a really substantial variation to the company's own forecast and the rest of the investment analyst community.
All that's left for me to add in this instance is that Forbar run a subsidiary company called Leveraged Equities that gives their clients the ability to short stocks. Maybe they are looking for more business with their subsidiary ?

My own view is that HGH is very cheap relative to the six Australian banks I follow all of which are trading in ostensibly the same environment as HGH.

[jimdog31]

I've seen the report and couldn't disagree with it more. The company itself is forecasting $84m at the mid point of their forecast range which translates to earnings of 14.3 cps and yet Forbar are only estimating 10.5 cps, claiming we are in the heart of the storm. The average analyst view of market screener is here and shows earnings for FY21 or 13 cps rising to 14 and 15 cps in the following years. https://www.marketscreener.com/quote/stock/HEARTLAND-GROUP-HOLDINGS-47041144/financials/

Rather than me make aspersions on their analysts work I would rather simply highlight that its at a really substantial variation to the company's own forecast and the rest of the investment analyst community.
All that's left for me to add in this instance is that Forbar run a subsidiary company called Leveraged Equities that gives their clients the ability to short stocks. Maybe they are looking for more business with their subsidiary ?

My own view is that HGH is very cheap relative to the six Australian banks I follow all of which are trading in ostensibly the same environment as HGH.

Arent forsyth the same crowd target price ATM $21.50?

[Baa_Baa]

After a sobering and expensive experience with brokers and their analysts in the early 90’s, I cut my own path, learnt basic FA and binged on TA. Owning a business for a while helped.

It’s worked pretty well so far. The only analysts you need imho are the generous collective members of ST. And the fortitude to make up your own mind and back your own research in your investing and trading. It’s also a lot more rewarding in many ways.

Disc own HGH and quietly accumulating these depressed prices.

Gltah.

[Beagle]

Not sure jimdog31...I am not following ATM or Synlait closely at this stage.

Top rated US analyst who had won some professional award was on CNBC this morning saying the financials' are heavily undervalued as a sector. Being priced for Armageddon, worse than GFC and is not warranted. He also made the astute observation that financials' have the highest covid beta so on any good news regarding a vaccine we could see a substantial rerating of this sector.

On another topic, I was a client of Forbar for more than a decade and left them about 15 years ago. I found their research to be of inconsistent quality. Some of their analysts had good insights and others...not so good. I have cut a very similar path to you Baa Baa and agree 100% with your viewpoint expressed above.

I have also been accumulating HGH shares and I now have more than ever held previously. There's not much point having funds on term deposit is there so the benefits of investing on the right side of the ledger so too speak, have never been more clearly defined !

[jimdog31]

Not sure jimdog31...I am not following ATM or Synlait closely at this stage.

Top rated US analyst who had won some professional award was on CNBC this morning saying the financials' are heavily undervalued as a sector. Being priced for Armageddon, worse than GFC and is not warranted. He also made the astute observation that financials' have the highest covid beta so on any good news regarding a vaccine we could see a substantial rerating of this sector.

On another topic, I was a client of Forbar for more than a decade and left them about 15 years ago. I found their research to be of inconsistent quality. Some of their analysts had good insights and others...not so good. I have cut a very similar path to you Baa Baa and agree 100% with your viewpoint expressed above.

I have also been accumulating HGH shares and I now have more than ever held previously.

Thanks Beagle. I'm pretty sure they are - even with the latest ATM news they held very close to that target. They are also the crowd that are pushing a price target of $13 for PPH, so the spread of their targets are wildly inconsistent , too high and too low.

I think their Excel may be in need of an update. They are probably using the same guys that built the spreadsheet for COVID tracking in the UK.

Anyway I agree with you, most of HGH market segments are spread to diversify the risk IMO.

[peat]

I remain disappointed but agree that the financial sector has been oversold and am currently in ANZ WBC and HGH

For this one, I'd really like to see some serious support kick in at 1.33 or thereabouts. Confluence of some useful moving averages around there on both the daily and the hourly.

12031
12032

[sb9]

https://www.nzx.com/announcements/361862


Heartland long-term rating affirmed, outlook remains stable
22 October 2020
Fitch Rating (Fitch) has affirmed the Long-Term Issuer Default Ratings (IDR) of Heartland Group Holdings Limited (NZX/ASX: HGH) (Heartland Group) and Heartland Bank Limited (NZX: HBL)
(Heartland Bank) at 'BBB' and the Long-Term IDR of Heartland Australia Group Pty Ltd (Heartland Australia) at 'BBB-'. The Outlooks remain Stable.
Heartland Bank remains one of just two Australasian banks to have no reduction or adverse change to its ratings or outlook despite the economic impacts of COVID-19 since January 2020.

[King1212]

Bloody good news!!

[sb9]

You gotta be very brave person to short this stock at current price level with strong earning guidance and other positive news that keeps flowing through...

[Beau]

Long time reader first time writer, have been a long time share holder and been a client with Heartland Group back before amalgamation of Ashburton Loan and Building Society and Ashburton Permanant Banks .
Believe this is quite an achievement going through one of the biggest global crisis they say more than 100 years. Intend to buy more.

[peat]

Long time reader first time writer, have been a long time share holder and been a client with Heartland Group back before amalgamation of Ashburton Loan and Building Society and Ashburton Permanant Banks .
Believe this is quite an achievement going through one of the biggest global crisis they say more than 100 years. Intend to buy more.

How long is that Beau - I mean for those of us who dont know HGH history time line?
And congrats on popping your post cherry.

Just to be the naysayer here, some would say we havent got through it yet. Especially banks. We dont know for sure but I still expect some tough times , its unlikely to be all beer and skittles and all the banks have made some large provisions, it just whether those impairments are large enough or too large is the crux of the issue.

[Beau]

I did state going through not gone through , not all beer and skittles but occasional beer
Loan and Building Society Days 1997 got a mortgage for motel complex found them extremely good to deal with .

[Snoopy]

I have recently been alerted to this threat to the Heartland 'golden goose' of REL mortgages in Australia.

https://householdcapital.com.au/corporate/our-story/

The article below is from April 2020.

https://householdcapital.com.au/media-highlights/household-capital-adds-uk-home-equity-market-expertise/

"Earlier this year, Legal & General, one of the largest providers of equity release products in the UK, took an (20%) equity stake in Household Capital Pty Ltd., citing Australia as a market with lots of potential."

From

https://www.moneymanagement.com.au/news/people-products/lg-acquires-20-household-capital

"This latest round of fundraising brought the total amount raised by Household Capital since 2017 to $25 million."

If I read this correctly, there is only $25m of Household Capital shareholder equity backing the entire reverse mortgage loan book.

So it doesn't sound like Legal & General had to outlay much cash to grab that 20% shareholding.

20% x $25m = $5m (only)

Nevertheless, in addition to the equity stake, Legal & General are providing funding capital to Household Capital Ltd. This builds on the $100m debt facility established with (also equity holder) ME bank (An Aussie bank 100% owned by 26 industry super funds) in 2019 (referenced below).

https://www.adviservoice.com.au/2019/04/me-bank-and-household-capital-establish-100-million-innovative-wholesale-home-equity-funding-facility/

From

https://www.finder.com.au/household-capital-reverse-mortgage

The current variable interest rate for a 'Household capital' loan is 5.15%, with a minimum loan amount of $50,000 and a maximum of $1,000,000. There is a 1.5% loan capital application fee on top of this which is added to the balance of your loan.

Sample calculation: Borrow $100,000 for four years.



Interest Due Year 1$5,227.25


Interest Due Year 2$5,496.45


Interest Due Year 3$5,779.52


Interest Due Year 4$6,077.17


Capital Charge$1,150.00


Total All Charges$23,730.39




From

https://www.finder.com.au/home-loans/heartland-seniors-finance

The equivalent borrowing rate at Heartland Seniors Australia is 5.8%, but Heartland have no application fee.

Sample calculation: Borrow $100,000 for four years.



Interest Due Year 1$5,800.00


Interest Due Year 2$6,136.40


Interest Due Year 3$6,492.31


Interest Due Year 4$6,868.87


Total All Charges$25,297.58




The underlying capital backing the Heartland Seniors reverse mortgage portfolio at EOFY2020 was:

$699.980m - $597.037m = $102.943m (c.f. $25m figure above)

This shows that with the share capital on the books currently allocated to Heartland Australia, our Heartland is fundamentally four times larger than this new 'Household Capital' challenger brand. But being a 'new brand on the block', it is not a surprise that a reverse mortgage taken out with 'Household Capital' will be somewhat less costly than the equivalent Heartland product (over four years at least).

(Note for comparison that Heartland's Reverse Mortgage variable interest rate in New Zealand is currently 6.2%)

Household Capital Pty Ltd. was established in 2016, and launched in 2017 as a specialist retirement funding provider.

Given all this, I don't see a significant cannibalisation threat from Household Capital Pty Ltd to Heartland's Seniors Australian business. These two are the only two active players of any size in the Australian REL market today. I see room for both brands to grow.

SNOOPY

[Beagle]

https://www.nzx.com/announcements/361862


Heartland long-term rating affirmed, outlook remains stable
22 October 2020
Fitch Rating (Fitch) has affirmed the Long-Term Issuer Default Ratings (IDR) of Heartland Group Holdings Limited (NZX/ASX: HGH) (Heartland Group) and Heartland Bank Limited (NZX: HBL)
(Heartland Bank) at 'BBB' and the Long-Term IDR of Heartland Australia Group Pty Ltd (Heartland Australia) at 'BBB-'. The Outlooks remain Stable.
Heartland Bank remains one of just two Australasian banks to have no reduction or adverse change to its ratings or outlook despite the economic impacts of COVID-19 since January 2020.

That was good news but seems to have been ignored by the market. Go figure ?

[Scrunch]

That was good news but seems to have been ignored by the market. Go figure ?

It is good news, particularly the stable outlook. For those not invested, a ratings company maintaining existing ratings is not going to change your view that a bank/finance company warrants a cheaper price in a recession. A lot of big investors were stung by high rated lending backed investment products not being genuinely worth their ratings during the GFC. I'm guessing that these potential investors aren't going to be convinced by rating companies, hence no wave of new buyers pushing up the price.

It probably means there's just a longer acquisition window as lead indicators like this don't move the price which waits for reconfirmation of the value through released results.

[mondograss]

The possibility of a third outbreak may have contributed to a bit of caution.

[Snoopy]

Jim wrote
"How the hell Heartland going to make any money ???"

Easy:



Market Leading Mortgage Interest Rate1.99%


less Market Leading Bank Interest Margin3.99%


equals Future Term Deposit Rate for Heartland Term Deposit Customers-2.0%





Just in case any depositors are worried about negative returns from their Heartland term deposits, I should point out that my table above does not show the full picture and was a 'tongue in cheek' reply.

Typically 'high risk banks' are required to back any loans they write. But that requires holding typically only 15% of their loaned out capital. So if term deposit rates did drop to -2% (not impossible but probably unlikely), or maybe 0% (more realistic - a NIM of 2% on deposited funds), then this would shrink Heartland's NIM down from 3.99% to 1.99% (apparently, or would it?). So on that basis it would be impossible to make any money if you were loaning out the money at the same rate you were borrowing it at. But that deposit NIM would only apply to 15% of the loan. The remaining 85% of the loan would not have to be funded by depositors.

That means from a 'profit perspective' Heartland's overall net interest margin that was 4% would decrease to:

(0.15 x 1.99) + (0.85 x 3.99) = 3.5% (actual effective NIM from a reduction in Heartland deposit rates by 2%)

At least, I think that is right. I am trying to show a non-proportional effect that reducing interest rates has on bank loan profits (and how Heartland can still make a profit with loan mortgage rates at 1.99%). This is made possible by retaining the existing 3.99% margin on the non bank backed part of the loan that is facilitated by the Reserve Bank of NZ being supportive of such lending. But no doubt I will be corrected if I have this wrong!

SNOOPY

discl: Not a banker

[jimdog31]

Long time reader first time writer, have been a long time share holder and been a client with Heartland Group back before amalgamation of Ashburton Loan and Building Society and Ashburton Permanant Banks .
Believe this is quite an achievement going through one of the biggest global crisis they say more than 100 years. Intend to buy more.

I have fond memories of MARAC finance too - when i started my first shop 12 years ago (Nov 2008 GFC!) - the banks wouldn't touch me, not even an OD - Marac loaned me $33k to get going ..... Then 2 years later they offered me a distressed store that they had security over - we did a deal - the other parties got to walk away without ugly bankruptcy process. Banks still wouldnt touch me four years in.

13 years later we are thriving. Thanks MARAC/HGH

Basically I think HGH does banking differently. Which is awesome in this environment....

[Beau]

I have fond memories of MARAC finance too - when i started my first shop 12 years ago (Nov 2008 GFC!) - the banks wouldn't touch me, not even an OD - Marac loaned me $33k to get going ..... Then 2 years later they offered me a distressed store that they had security over - we did a deal - the other parties got to walk away without ugly bankruptcy process. Banks still wouldnt touch me four years in.

13 years later we are thriving. Thanks MARAC/HGH

Basically I think HGH does banking differently. Which is awesome in this environment....


Yes found Ashburton Loan and Building very accommodating right from when we walked in the door, even though interest rates of 9% in 1997 they could see our vision for the complex. Five years later had loan paid off sold lease then 18 months on sold land and buildings more than doubling our investment with there support. Over that time they amalgamated with Ashburton Permanant we purchased our entitled allotment of shares a little while later they even gave us some shares. Thats how we got on our Heartland journey.

[percy]

Thanks jimdog31 and Beau,
Great hearing real life positive experiences.

[Snoopy]

I don't see a significant cannibalisation threat from Household Capital Pty Ltd to Heartland's Seniors Australian business. These two are the only two active players of any size in the Australian REL market today. I see room for both brands to grow.


The concept of a bank organising their loan portfolio to take into account Reserve Bank mandated risk weightings is nothing new. Depending on how risky a class of loans is seen to be, the Reserve Bank can tailor the required capital to be held by a loaning bank to suit. Home mortgage lending has for a long time been regarded as the least risky form of lending, with the caveat that as the loan value to asset value ratio rises the risk of a home loan does go up. The Reserve Bank accounts for this by demanding a loaning bank has a greater amount of equity capital set aside for a more highly geared mortgage. Why is this of interest to HGH shareholders?

HGH shareholders supply the equity capital for Heartland. Thus if the Reserve Bank changes its asset class loan rating for a category of loans that means the bank must hold more capital for a given loan portfolio size. That extra capital must come from shareholders, either by reducing dividends paid to them or asking shareholders directly for more cash in a capital raising. Both these courses of action have negative implications for the HGH share price.

p19 of the recently released Forsyth Barr report on Heartland highlights just such a risk that I wasn't aware of:

"A significant risk for Heartland's reverse mortgage business is a potential change to the reverse mortgage weight risk used to calculate credit risk of risk weighted assets. Currently Heartlands reverse mortgage weight risks are ~52%"

APRA (the Australian Prudential Regulatory Authority ) had proposed that The RWA value for Reverse Mortgages be increased to 100% (effectively doubling the amount of capital that Heartland would have to hold against them). But after industry consultation, they decided to retain the current RWA ratings in 2019, provided the LVR ratio of the mortgage remained below 60%. In the case of Reverse Mortgages operated by HGH this is almost always the case (contracted LVAR 15% to 40%, so 60% indicates a borrower living until 100 or more, or a property market collapse). ForBarr considers the NZ reverse mortgage market has a similar unresolved risk.

I do not understand why APRA (or RBNZ) would even consider increasing the risk weighting on reverse mortgages. The underlying asset is exactly the same as an ordinary residential mortgage, except if anything the gearing tends to be lower. So if anything it would make more sense to reduce the risk rating for reverse mortgages, not increase it. Ordinary residential mortgages can have an RWA factor as low as 35% (p11 Forbarr report). I do see this as an overblown risk from a Forbarr perspective and this is an important reason why I am more bullish on HGH's prospects than they are.

SNOOPY

[Cyclical]

Just in case any depositors are worried about negative returns from their Heartland term deposits, I should point out that my table above does not show the full picture and was a 'tongue in cheek' reply.

Typically 'high risk banks' are required to back any loans they write. But that requires holding typically only 15% of their loaned out capital. So if term deposit rates did drop to -2% (not impossible but probably unlikely), or maybe 0% (more realistic - a NIM of 2% on deposited funds), then this would shrink Heartland's NIM down from 3.99% to 1.99% (apparently, or would it?). So on that basis it would be impossible to make any money if you were loaning out the money at the same rate you were borrowing it at. But that deposit NIM would only apply to 15% of the loan. The remaining 85% of the loan would not have to be funded by depositors.

That means from a 'profit perspective' Heartland's overall net interest margin that was 4% would decrease to:

(0.15 x 1.99) + (0.85 x 3.99) = 3.5% (actual effective NIM from a reduction in Heartland deposit rates by 2%)

At least, I think that is right. I am trying to show a non-proportional effect that reducing interest rates has on bank loan profits (and how Heartland can still make a profit with loan mortgage rates at 1.99%). This is made possible by retaining the existing 3.99% margin on the non bank backed part of the loan that is facilitated by the Reserve Bank of NZ being supportive of such lending. But no doubt I will be corrected if I have this wrong!

SNOOPY

discl: Not a banker

Hey Snoopy, what am I missing here? Are you implying that a "high risk bank" can fund 85% of a mortgage loan with cheap money from the RBNZ, presumably at the OCR? Does that then mean you are basing your 3.5% NIM off a forward looking OCR of -2%. If so, their current NIM on the 1.99% special isn't flash but is that Heartland taking an educated punt on the likelihood that the OCA is going to be circa -2% in the not too distant future? Mind you, the special is only for 12 months fixed isn't it, so just attractive enough to lure/buy some customers and then look to build that NIM further down the track?

[Snoopy]

Hey Snoopy, what am I missing here? Are you implying that a "high risk bank" can fund 85% of a mortgage loan with cheap money from the RBNZ, presumably at the OCR? Does that then mean you are basing your 3.5% NIM off a forward looking OCR of -2%. If so, their current NIM on the 1.99% special isn't flash but is that Heartland taking an educated punt on the likelihood that the OCA is going to be circa -2% in the not too distant future? Mind you, the special is only for 12 months fixed isn't it, so just attractive enough to lure/buy some customers and then look to build that NIM further down the track?

My logic is based on looking at the 'before' and 'after' picture, comparing a NIM of 4% from the previous year against whatever it might shrink to over FY2021.

I am saying that:

1/ IF you compare 4% from 'last year' (somewhat hypothetical because this is the average NIM for all loans across the HGH group and Heartland weren't pushing regular mortgages at all last year), but take into account that the reduced margin on the 'borrowed from the term deposit holder' (margin now down from 4% to 2% based on 1.99% mortgage rate and zero interest being paid to the deposit holder - Note I have given up on the idea of the deposit holder being 'paid' (sic) -2%) loan component

2/ THEN the margin for the 'whole of the loan' reduces by much less than the 2% reduction in loan margin for the 'term deposit funded' part of the loan might imply. Why?

What I haven't commented on is the cost of the loan money not covered by 'term deposit money'. I am saying that the cost of issuing this money (85% of the loan capital effectively created out of thin air) is regulated by the Reserve Bank. And I am saying that because the Reserve Bank is keen to keep the wheels of business turning, they will not make it harder for Heartland to access the 85% balance of RBNZ regulated loan money that they want Heartland to lend out.

(0.15 x 1.99) + (0.85 x 3.99) = 3.5% (actual effective NIM from a reduction in Heartland deposit rates by 2%)

From p18 of the initial ForBarr report on Heartland :

"Since the outbreak of Covid-19, the RBNZ has also taken a number of reactive measures. In addition to announcing a 75% percentage point rate cut to 0.25%, the RBNZ introduced a number of support mechanisms in addition to relaxing the requirements around lending restrictions."

SNOOPY

[Cyclical]

My logic is based on looking at the 'before' and 'after' picture, comparing a NIM of 4% from the previous year against whatever it might shrink to over FY2021.

I am saying that:

1/ IF you compare 4% from 'last year' (somewhat hypothetical because this is the average NIM for all loans across the HGH group and Heartland weren't pushing regular mortgages at all last year), but take into account that the reduced margin on the 'borrowed from the term deposit holder' (margin now down from 4% to 2% based on 1.99% mortgage rate and zero interest being paid to the deposit holder - Note I have given up on the idea of the deposit holder being 'paid' (sic) -2%) loan component

2/ THEN the margin for the 'whole of the loan' reduces by much less than the 2% reduction in loan margin for the 'term deposit funded' part of the loan might imply. Why?

What I haven't commented on is the cost of the loan money not covered by 'term deposit money'. I am saying that the cost of issuing this money (85% of the loan capital effectively created out of thin air) is regulated by the Reserve Bank. And I am saying that because the Reserve Bank is keen to keep the wheels of business turning, they will not make it harder for Heartland to access the 85% balance of RBNZ regulated loan money that they want Heartland to lend out.

(0.15 x 1.99) + (0.85 x 3.99) = 3.5% (actual effective NIM from a reduction in Heartland deposit rates by 2%)

From p18 of the initial ForBarr report on Heartland :

"Since the outbreak of Covid-19, the RBNZ has also taken a number of reactive measures. In addition to announcing a 75% percentage point rate cut to 0.25%, the RBNZ introduced a number of support mechanisms in addition to relaxing the requirements around lending restrictions."

SNOOPY

Thanks Snoopy, I think I know where you are coming from, but personally I'm struggling to arrive at ~3.5%, unless you think OCR is going to -2% while Mortgage rates remain unchanged at 1.99%.

Here's my stab at it, all things being equal...please tell me where I'm going wrong:



At today’s rates:





Laon Amount
$100,000.00
1.99%
$1,990.00








Funding Sources:





Term Deposit
$15,000.00
1.05%
$157.50


RBNZ
$85,000.00
0.25%
$212.50


Total Loan Cost


$370.00










NIM ($)
$1,620.00




NIM (%)
1.62%














Hypothetical in 6 months:





Laon Amount
$100,000.00
1.49%
$1,490.00








Funding Sources:





Term Deposit
$15,000.00
0.25%
$37.50


RBNZ
$85,000.00
-1.00%
-$850.00


Total Loan Cost


-$812.50










NIM ($)
$2,302.50




NIM (%)
2.30%

[Snoopy]

Thanks Snoopy, I think I know where you are coming from, but personally I'm struggling to arrive at ~3.5%, unless you think OCR is going to -2% while Mortgage rates remain unchanged at 1.99%.

Here's my stab at it, all things being equal...please tell me where I'm going wrong:



At today’s rates:





Loan Amount
$100,000.00
1.99%
$1,990.00








Funding Sources:





Term Deposit
$15,000.00
1.05%
$157.50


RBNZ
$85,000.00
0.25%
$212.50


Total Loan Cost


$370.00










NIM ($)
$1,620.00




NIM (%)
1.62%
















Hypothetical in 6 months:





Loan Amount
$100,000.00
1.49%
$1,490.00








Funding Sources:





Term Deposit
$15,000.00
0.25%
$37.50


RBNZ
$85,000.00
-1.00%
-$850.00


Total Loan Cost


-$812.50










NIM ($)
$2,302.50




NIM (%)
2.30%





I think I can get that net interest margin up a bit Cyclical. A home loan has an RWA (Risk Weightings Adjustment) as low as 35%. That means the loan capital to back up a 35% RWA $100,000 mortgage is not $15,000, but only 0.35 x $15,000 = $5,250. So the bank's cost of 'income in' verses 'funding' on that loan now look like this:



At today’s rates:





Loan Amount
$100,000.00
1.99%
$1,990.00








Funding Sources:





Term Deposit
$5,250.00
1.05%
$55.13


RBNZ
$94,750.00
0.25%
$236.88


Total Loan Cost


$292.01










NIM ($)
$1,697.99




NIM (%)
1.70%















That is of course is just the interest charge bit of the NIM. Normally on top of that there are application fees, approval fees, variation fees etc. Looking on the Heartland website for 'mortgage fees', this particular 1.99% offer looks clean (although that 20% deposit requirement might knock out some applicants). However, I think the key point here is that historical Heartland's 4% net interest margin is across the whole loan book. In some loan categories, the NIM would be less than 4%. Furthermore the 'net interest margin' is only one input factor into the 'net profit margin'. It might be worthwhile settling for a lower NIM if it meant less follow up was required to manage payments due, which implies a positive effect on the 'net profit margin'.

SNOOPY

[Scrunch]

IMO there isn't 3-4% margin home loan lending for the sub-set of borrowers with 20%+ equity.

What there is however, is potentially strong returns on the equity HGH needs to put in to back these loans. As Snoopy notes, they are a 5% not 15% equity product. If HGH lends $100m, and get a 1 to 1.5% net margin, its earning $1-1.5m/yr in margins from the $100m lent. With only $5m of equity allocated to the loans, the $1 to $1.5m made is now generating a 20% to 30% return on equity.

Across 2015 to 2020 HGH had a net surplus/equity ratio between 10% and 11%. Operational expenses and tax will lower the returns noted above and any fees charged will increase it. After factoring these in, the lending would look to have the potential to increase, rather than lower surplus/equity ratio - assuming you have an operationally efficient process behind the scenes. This is inherently possible from a web-based application process to borrowers with a low risk profile.

If done properly, lending at 2-2.5% still has the potential to be value creating relative to other lending alternatives. If done on any scale, it would however lower the NIM and lower impairment levels.

[Snow Leopard]

What is this?

Heartland Bank staff go on strike (https://www.stuff.co.nz/business/123213634/heartland-bank-staff-go-on-strike-for-cost-of-living-wage-increase)

[Cyclical]

What is this?

Heartland Bank staff go on strike (http://Heartland Bank staff go on strike)



Broken link there Snow Leopard. Here's another http://business.scoop.co.nz/2020/10/27/heartland-bank-workers-take-strike-action-in-auckland-over-low-pay-rates/

The market doesn't seem too phased by it ATM.

[Beagle]

This can't be right. They have repeatedly told shareholders they want to be known as the Maori employer of choice and told us ad nauseum about their multitude of cultural sensitivity and inclusiveness programs and all the time while the CEO makes sure he is extremely well paid for a modest sized bank. Surely the employees are not paying for all this politically correct nonsense ?

[iceman]

This can't be right. They have repeatedly told shareholders they want to be known as the Maori employer of choice and told us ad nauseum about their multitude of cultural sensitivity and inclusiveness programs and all the time while the CEO makes sure he is extremely well paid for a modest sized bank. Surely the employees are not paying for all this politically correct nonsense ?

Do you reckon they may take this to the Waitangi Tribunal rather than the Employment Tribunal :D:D:D

[Cyclical]

I think I can get that net interest margin up a bit Cyclical. A home loan has an RWA (Risk Weightings Adjustment) as low as 35%. That means the loan capital to back up a 35% RWA $100,000 mortgage is not $15,000, but only 0.35 x $15,000 = $5,250. So the bank's cost of 'income in' verses 'funding' on that loan now look like this:



At today’s rates:





Loan Amount
$100,000.00
1.99%
$1,990.00








Funding Sources:





Term Deposit
$5,250.00
1.05%
$55.13


RBNZ
$94,750.00
0.25%
$236.88


Total Loan Cost


$292.01










NIM ($)
$1,697.99




NIM (%)
1.70%















That is of course is just the interest charge bit of the NIM. Normally on top of that there are application fees, approval fees, variation fees etc. Looking on the Heartland website for 'mortgage fees', this particular 1.99% offer looks clean (although that 20% deposit requirement might knock out some applicants). However, I think the key point here is that historical Heartland's 4% net interest margin is across the whole loan book. In some loan categories, the NIM would be less than 4%. Furthermore the 'net interest margin' is only one input factor into the 'net profit margin'. It might be worthwhile settling for a lower NIM if it meant less follow up was required to manage payments due, which implies a positive effect on the 'net profit margin'.

SNOOPY

Yep, clear as mud now Snoopy. I think I may have been a bit too focused on the home loan side of things, probably off the back of this paragraph below, as opposed to the entire loan book.


I am trying to show a non-proportional effect that reducing interest rates has on bank loan profits (and how Heartland can still make a profit with loan mortgage rates at 1.99%). This is made possible by retaining the existing 3.99% margin on the non bank backed part of the loan that is facilitated by the Reserve Bank of NZ being supportive of such lending.


IMO there isn't 3-4% margin home loan lending for the sub-set of borrowers with 20%+ equity.

What there is however, is potentially strong returns on the equity HGH needs to put in to back these loans. As Snoopy notes, they are a 5% not 15% equity product. If HGH lends $100m, and get a 1 to 1.5% net margin, its earning $1-1.5m/yr in margins from the $100m lent. With only $5m of equity allocated to the loans, the $1 to $1.5m made is now generating a 20% to 30% return on equity.

Across 2015 to 2020 HGH had a net surplus/equity ratio between 10% and 11%. Operational expenses and tax will lower the returns noted above and any fees charged will increase it. After factoring these in, the lending would look to have the potential to increase, rather than lower surplus/equity ratio - assuming you have an operationally efficient process behind the scenes. This is inherently possible from a web-based application process to borrowers with a low risk profile.

If done properly, lending at 2-2.5% still has the potential to be value creating relative to other lending alternatives. If done on any scale, it would however lower the NIM and lower impairment levels.

Yeah Scrunch, agreed. A bit like retail isn't it, some get hung up on margin, but in this business, margin (NIM) is probably going to continue to track down, so they need to accept that and counter with greater scale, which is what they are gunning for with the 1.99% offer I guess...and is something the RBNZ and consequently the property market seem quite happy to accommodate atm. What could possibly go wrong? ;)

[Scrunch]

Yep, clear as mud now Snoopy. I think I may have been a bit too focused on the home loan side of things, probably off the back of this paragraph below, as opposed to the entire loan book.





Yeah Scrunch, agreed. A bit like retail isn't it, some get hung up on margin, but in this business, margin (NIM) is probably going to continue to track down, so they need to accept that and counter with greater scale, which is what they are gunning for with the 1.99% offer I guess...and is something the RBNZ and consequently the property market seem quite happy to accommodate atm. What could possibly go wrong? ;)

It all depends whether the boffins doing the sums on the pricing have a good handle on the associated operating costs. If they do and growth rolls in, it going to be profitable growth. At a certain level additional equity may be needed to support that growth. Hgh would then have a choice, slow the rate of growth or raise some equity. Neither is really a big problem.

[KJMLimited]

On a completely different issue, it looks like the Harmoney IPO is good to go. Pricing is confirmed with cornerstone investors in place.

[Beagle]

Do you reckon they may take this to the Waitangi Tribunal rather than the Employment Tribunal :D:D:D

That's gold right there....post of the week lol

Good if they float off that harmoney...I don't see ownership of Harmoney as being a very harmonious experience going forward....frankly I have never liked that part of HGH's business. Loaning money to Muppets on an unsecured basis never ends well no matter what interest rate you try and charge them.

[KJMLimited]

Who said that Heartland are selling their Harmoney shares? There's no announcement on that so you might still be stuck with them.

[Snoopy]

http://business.scoop.co.nz/2020/10/27/heartland-bank-workers-take-strike-action-in-auckland-over-low-pay-rates/

The market doesn't seem too phased by it ATM.


This whole 'bank' thing is starting to rebound on Heartland. Workers now expect to be paid as if they were working in a real bank, even though all the day to day banking functions for Heartland have been outsourced to Westpac.

Even Forsyth Barr have been taken in with their initial investment report on Heartland. ForBarr highlight that 'Heartland Bank' has a loan book amounting to just 1% of bank assets verses the big four Australian's 89%. ForBarr highlight the higher funding costs of Heartland verses the 'big four', - notwithstanding that, despite this, Heartland still easily beats the Aussies's on 'Net Interest Margin'! ForBarr then make the leap that high interest margin means 'high risk' and that means 'big loan right offs' in this Covid-19 environment (not forecast by HGH themselves I might add).

If instead ForBarr saw 'Heartland Bank' as the finance company it is, they would see that Heartland is not a minnow but a big fish in the finance company pond. ForBarr may yet be right about big write offs to come not fully foreseen by Jeff, who has admitted that he is guessing, like everybody else, as to what the real downstream effect of Covid-19 on Heartland will be. Yet even Forbarr is predicting the NPAT will be $80.9m by FY2023 (p1 ForBarr report), above the FY2020 operational result of $78.9m (without the Covid-19 overlay). As a long term investor I am prepared to look through this initial Covid-19 shock and look at what I expect to see coming out the other side. I see a strong finance company, with a strong Reverse Mortgage market share (where else are the oldies going to get their money now their term deposit returns have collapsed) and a strong presence in a resurgent motor vehicle market (remember the NZ motor vehicle fleet was seriously aging before Covid-19 and the vehicle replacement tailwind still exists).

Forbarr are sceptical that the new long term funding from the northern hemisphere at an estimated 3.5% to 4% will deflate Heartland's margins. The real issue though is that this new funding much better matches the timeframe of the reverse mortgages the cash has been taken in to fund. So I see this as serious de-risking of the reverse mortgage business cashflow. That means a reduced 'capital call' demand on HGH shareholders into the future.

Rather than being crushed by the big banks, I can see Heartland gaining market share from the market that C class lenders have had to abandon as they collapse. The need for finance companies that trade in niche markets not favoured by the big banks will not go away. By FY2023, if not before, I see Heartland not only as a Covid-19 survivor, but a Covid-19 winner.

SNOOPY

[Cyclical]

Good if they float off that harmoney...I don't see ownership of Harmoney as being a very harmonious experience going forward....frankly I have never liked that part of HGH's business. Loaning money to Muppets on an unsecured basis never ends well no matter what interest rate you try and charge them.

This referring to Harmoney clients as Muppets is pretty harsh. Why are you labelling people as such? Maybe they're a bit sharper than you think, perhaps they've done the sums and figured that if they need a short term loan it's not a bad place to go, with potentially competitive interest rates if you've got the right kind of credit rating, a quick answer, relatively instantaneous access to the funds and the ability to pay it back as soon as you like without penalty, all without putting security at risk apparently.

As for Heartland's stake, I don't have a problem with them doing some small diversification into that market. I've got every faith in the boffins at HGH to do the risk/reward analysis and draw the conclusion that it complements their business. It may appear slightly out of their comfort zone and it could cause some pain in the next year or two, but nothing ventured, nothing gained. And with the pending public listing, they've got an out if they so desire, likely at a tidy capital gain to boot.

Harmoney themselves do their due diligence on their lending, delving into your bank accounts and credit history and who knows what else, plus they probably limit their exposure to the complete "Muppet" end of the spectrum to ensure the risk is suitably hedged. Certainly there were plenty of happy lenders in the ST peer to peer lending forum when it was possible...

[Beagle]

Agree to disagree on this one mate. Unsecured lending is incredibly risky in a recession and extremely unlikely to be profitable. That's my view on it but fill ya boots if you want more exposure. https://events.miraqle.com/FormBuilder/_Resource/_module/hHqoUFGw6ESQTYkD-NOd0w/file/Harmoney_Prospectus.pdf Prospectus just released today. I hope HGH are selling part of their stake.

Snoopy me ol Beagle mate. What's going on. We have a Beagle on the marketing team but the share price is going down :confused:
https://www.heartland.co.nz/

[Baa_Baa]

Happy to be out of this for the meantime, after a few years the only thing that kept it a profitable investment was the dividends. Sadly it's looking more like a traders stock than an investors stock. I'm not prepared to speculate on a finance company/pseudo-bank in these uncertain times.

gltah, though I'm gone.

[King1212]

Sp retreat is a normal thing in the share market. HGH has a good run since the result n now just drifting back a bit.

When SP down....again a lot of rampers in again....hgh has proven thier track record....it is a resilience finance company and well managed good management....

It is a safe stock to own compare with others which has recovered and high since covid lockdown.

Hgh is down 50c since pre covid-19....so again this is a keeper

[Beagle]

Agreed. Should make for an excellent recovery stock in 2021.

[sb9]

Gosh, didn't think this fall to these levels....

[oldtech]

A good number of the companies I watch have been falling over the past week or more, US election jitters?

[calledone]

A good number of the companies I watch have been falling over the past week or more, US election jitters?

Yeah I think election jitters too. Also a lot of stop losses triggering maybe.

[BlackPeter]

Gosh, didn't think this fall to these levels....

deleted ... looked at the last closing SP. It appears times have changed :):

[Beagle]

Heartland selling down some of its stake in the Harmoney as part of the listing. https://www.nzherald.co.nz/business/harmoney-founder-and-shareholders-to-cash-in-nearly-24m-on-share-sale-and-ipo/JIDGKZD42XA5QN6GGRTXW3C5UY/
"NZX-listed Heartland Group will reduce its stake from 11.8 per cent to 8.4 per cent".

[Snow Leopard]

Heartland selling down some of its stake in the Harmoney as part of the listing. https://www.nzherald.co.nz/business/harmoney-founder-and-shareholders-to-cash-in-nearly-24m-on-share-sale-and-ipo/JIDGKZD42XA5QN6GGRTXW3C5UY/
"NZX-listed Heartland Group will reduce its stake from 11.8 per cent to 8.4 per cent".

No they are not selling down.
Their dilution is purely due to the issue of new shares.

[Beagle]

No they are not selling down.
Their dilution is purely due to the issue of new shares.
As reported :-
"Existing shareholders will get A$22.5 million ($23.9m) of the A$92.5m set to be raised through the initial public, a prospectus for the offer released on Friday shows. It is due to list on November 19. Major shareholders will sell a portion of their shareholding into SaleCo - a special purpose vehicle set up to facilitate the process - which will then on sell the shares as part of the offer."

[Snow Leopard]

As reported :-
"Existing shareholders will get A$22.5 million ($23.9m) of the A$92.5m set to be raised through the initial public, a prospectus for the offer released on Friday shows. It is due to list on November 19. Major shareholders will sell a portion of their shareholding into SaleCo - a special purpose vehicle set up to facilitate the process - which will then on sell the shares as part of the offer."

Read the friggin Prospectus (Page 35)!

[Beagle]

Read the friggin Prospectus (Page 35)! I don't have the time to pussyfoot around !

[Snow Leopard]

I don't have the time to pussyfoot around !

Well shut up then.

[Beagle]

Well shut up then.

Well excuse me for posting what was reported in the NZ Herald.

[winner69]

NZ Herald article needed to be read slowly to comprehend

Pertinent extract from Prospectus:

The Selling Shareholders are employees and directors and Unaffiliated Shareholders who are Existing Shareholders who have each agreed to sell a portion of their Existing Shares to SaleCo prior to Listing.

[winner69]

NZ Herald article needed to be read slowly to comprehend.

For the record Heartland et al number of shares after the IPO same as before

Pertinent extract from Prospectus:

The Selling Shareholders are employees and directors and Unaffiliated Shareholders who are Existing Shareholders who have each agreed to sell a portion of their Existing Shares to SaleCo prior to Listing.

[KJMLimited]

The NZ Herald is hardly the definitive source for anything. P167 (Section 7.2 of the prospectus) gives you the before and after shareholder stack so work off that. Sale Co is the vehicle for some existing shareholders (staff and management) to sell $22.5m worth shares collectively into the IPO, which is not 100% of what they own btw. Heartland isn't part of this. If the bookbuild is big enough, I believe there may be an option for existing shareholders to sell more, and that might include Heartland. But they are all escrowed for the moment according to the prospectus (P176 to 178).

[King1212]

Roberts, who founded Harmoney in 2013 as New Zealand's first peer to peer lender, will remain the biggest shareholder through his trustee company but will see his stake in Harmoney drop from 27.5 per cent to 18.4 per cent.
While Michael Lookman and associated family trusts will reduce their share from 12.6 per cent to 9 per cent.
Kirwood Capital Partners - an Australian private equity investor which bought a stake in the business a few years back, will go from 12.1 per cent to 8.7 per cent and NZX-listed Heartland Group will reduce its stake from 11.8 per cent to 8.4 per cent.
Trade Me will also drop from 10.6 per cent to 7.6 per cent.
Only 26.2 per cent of the newly listed company will be owned by new shareholders and there will be restrictions on when many of the existing shareholders can further sell their shares.

[Snoopy]

Heartland was up 2c when the announcement came through it had acquired a 10% stake.

2c x 463.3m Heartland shares = $9.26m. So HarMoney in total must be worth

$9.26m/ 0.1 = $92.6m today, according to Heartland shareholders.


The above I wrote in September 2014 when the purchase of an 'approximately 10%' stake in Harmoney by Heartland was announced.

Not being a separately listed investment (yet) Heartland was under no obligation to revalue their Harmoney stake every year. I see from AR2015 p43 under Note 9 (Investments) that Heartland paid $6.719m for their stake in Harmoney (11% stake) AND an equity investment in another company "Ora HQ Limited" (12% stake). Ora HQ Limited provided business analysis through a cloud based software platform. The Company offered customers a platform for maintaining performance reports, market news, customer and competitor research, digital marketing channels and other related analysis and research. Ora HQ served small businesses throughout New Zealand. According to the NZ company's website

http://www.companiesnz.com/company/3019483/ora-hq-limited

Ora HQ Limited went into receivership in 2018.

On 12th January 2015 Heartland announced:

"Harmoney has completed a successful $10m capital raise in which Trade Me has taken a 15% shareholding in Harmoney. As part of this capital raise, Heartland has increased its investment in Harmoney to maintain its existing shareholding of approximately 10%. Based on the investment made by Trade Me, the current implied value of Heartland’s investment in Harmoney is in excess of $5.0m. Following the capital raise, Heartland will have invested approximately $3.5m in Harmoney. Heartland’s initial investment in September 2014 was prior to the launch of Harmoney’s platform and formed part of a wider commercial arrangement."

Working back through the numbers, if Trade Me had 15% of Harmoney after this capital raise, then Heartland must have increased their own investment in Harmoney by 15% to maintain the same percentage shareholding they had before Trade Me came on board. So the original investment (OI) by Heartland into Harmoney must have been:

OI x 1.15 = $3.5m => OI = $3.0m

The Harmoney investment by TradeMe would suggest an incremental gain on the holding value of Heartland's 'Harmoney' investment of:

$5.0m -$3.5m = $1,5m

What has been said on 'equity investments' in successive annual reports follows:

----------

FY2016/ The value of all equity investments increased over the year (see AR2016 p49 ) by:

$7.291m - $6.719m = $0.572m

This change is after a gain on the sale of investments of $1.136m (AR2016 p46). If we add the gain on the sale of investments onto the end of year balance figure, and then subtract the total investment balance from the previous year I get:

($7.291m + $1.136m) - $6.719m = $1.708m

That $1.708m could include the $1.5m gain recognised as part of a new carrying value of Harmoney. However, I am unable to see where such a change in value has been taken account of in the 'Statement of Comprehensive Income' for FY2016.

FY2017/ Moving on to note 9 of AR2017 the value of 'investments' has increased from $7.291m to $11.791m = $4.5m. During the year some investments were sold meaning a gain of $0.628m was booked as part of 'Comprehensive Income'.

FY2018/ By FY2018 'Equity Investments' had reduced from $11.791m to $9.694m, a drop of $2.097m (AFR2018 p28) although $0.156m of investment sale profits were booked during the year (AFR2018 p25).

FY2019/ Rolling on to FY2019 (AFR2019 p22) 'Equity Investments' have increased to $12.435m from $9.694m (a rise of $2.741m) after $0.174m gain was realised on investments sold (AFR2019 p18).

FY2020/ Finally by FY2020 (AR2020 p107) $16.335m of equity investments were recorded on the books. This represented a rise in the equity investment balance of $3.9m. There were no reported gains on investment sales over FY2020 (AR2020 p100).

--------

An interest.co.nz article on the October 2019 'C' capital raising:

https://www.interest.co.nz/news/102348/online-lender-harmoney-raises-almost-47-mln-aussie-private-equity-fund-and-2-unnamed

suggested that new investment of $NZ25m by Kirkwood capital of Melbourne implied an overall valuation of Harmoney north of $100m. Kirkwood's 13,4% stake at that time would suggest an overall valuation of the company of:

$NZ25m/ 0.134 = $187m

That $187m figure is 'considerably north of $100m'.

The 30th October Harmoney prospectus is now touting a 'market capitalisation offer price' of $A353.2m, after the completion of the public capital raising. At that price, the Heartland 8.4% stake would be worth:

0.084 x $A353.2m = $A29.7m / 0.94 = $NZ31.5m

There is a missing peace ti this puzzle. In the pre-Restructure Shareholdings, the Heartland stake in Harmoney was 11.8% (Harmoney Prospectus p35). So did Heartland add in some more capital to take their stake from 11% to 11,8%? I can't find a press release that says so. P35 in the Harmoney prospectus notes that Heartland owned 1,966,555 'Series B' shares. A report on the Sries B capital raising on 16th February 2016 is here:

https://www.altfi.com/article/1744_kiwi_p2p_marketplace_closes_85m_series_b_fina ncing_round

This suggests that a UK based company 'Alternative Credit Investments' took a stake worth up to $8.5m. Spread over 3,933,109 shares (Harmoney Prospectus p35), this suggests a capital raise share price of up to: $8.5m / 3,933m = $2.16. I will guess the capital raise was done at the 'round figure' of $2. If that is what happened, then Heartland must have increased their investment in Harmoney by

$2 x 1,966,555shares = $3.955m

However that figure doesn't correspond with any new Heartland equity investment capital outlayed over FY2016 as I have reported above :-(. Oh dear! It is getting late and this is the best I can make of a far from clear situation. However, whatever way you slice this deal, it does appear that Heartland will be in for at least a $20m 'windfall one off on paper profit', should the Harmoney float go through at the price projected.

SNOOPY

[Beagle]

Help me out then my Beagle friend because I'm just an overworked time poor Beagle trying to follow too many companies and cats are never a dog's friend and all the resident one ever wants to do is claw me. (Cruel animal he is).

So their stake is now worth $A3.50 per share x $8,518,864 shares = ~A30m. Seems like a pretty tidy unrealized profit but didn't they invest a bit more later on ?

[nztx]

Help me out then my Beagle friend because I'm just an overworked time poor Beagle trying to follow too many companies and cats are never a dog's friend and all the resident one ever wants to do is claw me. (Cruel animal he is).

So their stake is now worth $A3.50 per share x $8,518,864 shares = ~A30m. Seems like a pretty tidy unrealized profit but didn't they invest a bit more later on ?


Heartland's purchase of 10% in 2014 is announced in pdf (on link) under:

https://shareholders.heartland.co.nz/media/1169/harmoney-release-8-sept-14-final.pdf

"HEARTLAND TO TAKE SHAREHOLDING IN HARMONEY

8 September 2014

Heartland New Zealand Limited (Heartland) (NZX: HNZ) advises that it has taken an approximately 10%
shareholding in HarMoney Corp Limited (HarMoney), New Zealand’s only licensed peer-to-peer lending
platform.

In conjunction with this, Heartland Bank Limited is providing a funding line to enable lending to a range
of individual borrowers using the platform. "



Digging further - Heartlands Filed Reports tend to not separately disclose Harmoney in Reports & Releases,
however -

On 12 Sep 2014 Heartland NZ Ltd is recorded at 12,355.363 shares

This increased around 2 Feb 2015 to 17,011,420 shares

the new shares in Feb 2015 from filed Co's Office Docs appear to have been issued at 32.514 cps

From Co's Office, it appears that Trade Me became HarMoney Stakeholders on 20 Feb 2015
with a holding of 23,815,974 shares

[Beagle]

Thanks, appreciated.

[winner69]

They say Harmoney market cap could A$353m.

heartland market cap A$743m .....hmmmm

[King1212]

That shows how undervalued hgh at current sp

[KJMLimited]

Heartland are not a Fintech stock though. Maybe that's why they want to be one.

[winner69]

Heartland are not a Fintech stock though. Maybe that's why they want to be one.

Heartland maybe see themselves as a Fintech and that’s why they want to be rated as one

On same income multiple Hgh be about $1.70

[KJMLimited]

Heartland maybe see themselves as a Fintech and that’s why they want to be rated as one

On same income multiple Hgh be about $1.70

I'm not sure. If they want to be valued as a Fintech it's all about presenting the market with future tech revenue growth even if from year 2 it is more of a guess than anything else.

[blockhead]

Had got down to just a few HGH left and a TD came due, no sense putting in the bank so today I bought the bank (@1.30).

Mention of sp of $1.70 has a nice touch about it !

[Snoopy]

Harmoney & Other Consumer Lending" had an OK year over FY2020 (p19 FY2020 presentation, PR2020) with the loan portfolio up 2% to $211m compared to FY2019. I am unclear as to exactly what has happened here. From the information in the link below:

https://www.interest.co.nz/news/106789/review-things-you-need-know-you-go-home-friday-more-td-rate-cuts-sagging-consumer

Harmoney are now a much smaller business. (Loan Book down from $367m to just $129m). Heartland own just 11.85% of Harmoney. (source NZ Companies Register below)

https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/5177041/shareholdings?backurl=H4sIAAAAAAAAAEXLQQoCMQyF4dt0 O7pwGcSNCs5CcC4Q2qiFaVOTVOntHbHi7n8fvKHgjXTwnArmuJ QSir9vH3BESZypOcoWrU2tkMJuHPu%2BGFrVg3AtX47Zs5S9cI LeE4PDEIRU%2F%2B8OJ2ovlgBODcVg5eaYosF64%2FS6YPg8n5 g9hTNmmsGkkkscCH7%2BBiKNrJq6AAAA

But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.

In direct contradiction to the 'interest.co.nz' Harmoney results reference above, p19 of PR2020 shows "Harmoney receivables increasing to $199m." Who can explain that discrepancy? Whatever the explanation, it certainly sounds like the Harmoney loan book is being incorporated into the Heartland loan book. But the reason for doing that is another mystery in itself (question posed below). Despite the slightly bullish tone on p19 of the AR2020 presentation, I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.

It does definitely appear as if Harmoney loans are listed in the 'Finance Receivables' in the Heartland balance sheet. However, a word search for Harmoney in the FY2020 accounts comes up blank. So I am not clear where Harmoney fits into the Heartland 'Finance Receivables'. One possibility: If I look in the Segmented Analysis of the AR2020 p98, we see the 'Other Personal' category having $214.759m in assets. This is similar to the $211m in assets figure listed on p19 of PR2020 for 'Harmoney and Other Consumer Lending' (again I can't explain the small difference).

I thought I might find Harmoney under note 11 'Investments' (AR2020 p106) under the equity sub header. But if Harmoney was an 'investment' based on the just 10.85% shareholding that Heartland held, then why have the Harmoney receivables -apparently - been consolidated inside the Heartland receivables? I don't follow how Harmoney has been treated in the Heartland accounts. So if anyone can unscramble it for me I will be all ears.


A bit more on how Harmoney gets the finance dollars to operate their business is disclosed in the Harmoney Prosoectus of 30th October 2020. This has ramifications for Heartland shareholders who were some of the earliest funders of Harmoney.

From Section 3.2.7.1 of the Harmoney Prospectus on New Zealand funding:



---------

"Prior to its New Zealand launch, Harmoney was granted the first New Zealand peer‐to‐peer licence by the FMA in 2014, creating a peer‐to‐peer marketplace that enabled retail lenders to lend to creditworthy customers. Alongside the launch of the peer‐to‐peer marketplace, Harmoney attracted $85 million of peer‐to‐peer funding from multiple institutional partners. The institutional peer‐to‐peer funding included a $50 million facility from a New Zealand bank." (Snoopy Note: I believe this NZ bank to be Heartland, consistent with Heartland's 8th September 2014 press release).

"This institutional peer‐to‐peer funding, in conjunction with the peer‐to‐peer marketplace, allowed Harmoney to successfully demonstrate the viability of its peer‐to‐peer lending model. Harmoney subsequently added three additional institutional peer‐to‐peer funders: a second New Zealand bank, a London Stock Exchange listed investment trust, and a New York-based asset manager. The terms of these commercial agreements vary but all compensate Harmoney with upfront fees paid by the peer‐to‐peer lender to Harmoney at the time the loan is funded. In addition, some peer‐to‐peer lenders also pay Harmoney a service fee and performance fee, with the potential for some of the upfront fees to be rebated by Harmoney to the peer‐to‐peer lender depending on the performance of the underlying receivables."

-------



I read that as though the funding banks (including Heartland) pay an up front fee when a loan is initiated and an extra fee on top of that if the interest charged ends up being 'above market expectations' (I am not sure what other interpretation you could put on a 'performance fee' for a loan). But also that Harmoney's 'finder fee' to Heartland will be rebated if a loan subsequently goes bad.



--------

"For the period the peer‐to‐peer marketplace was operating, approximately 20% of monthly New Zealand loan volumes were allocated to retail lenders, with the remainder, prior to the introduction of the warehouse funding model, being funded by institutional peer‐to‐peer funders."

---------



If we take the balance sheet at the end of FY2019 (30th June 2019), a 'time snapshot' where the retail peer to peer lending operation was still in full flight, we have total Harmoney lending of $NZ149.7m (NZ) + $NZ39.8m (Oz) = $NZ189.5m on the Heartland books (PR2019 p18).

So we can work out that 'institutional peer funders' funded approximately: 0.8 x $147.7 = $118m of that total. Of that sub total, Heartland will have funded up to: $50m/$118m = 42% of the institutionally backed portion of the NZ Harmoney loan book (more if you remove Warehoused loans)? This is substantially more than Heartland's 10.85% equity stake in Harmoney might otherwise suggest, if their loan book commitment and their equity stake in Harmoney were in balance.




------

"During this period, the retail peer‐to‐peer loan book grew to approximately $80 million, which was funded by approximately 10,000 retail lenders."

-------



$189.5m - $118m = $71.5m. $71.5m is 'approximately $80m'. The actual peak figure (which would be higher) would most likely have been reached after 30th June 2019 but before the wind down in the Harmoney retail peer to peer loan book was initiated later in calendar year 2019. The $80m figure would suggest that the initial expansion by Harmoney into Australia was entirely funded by retail peer to peer investors.



--------

"In December 2018, Harmoney established its second funding channel – the New Zealand Warehouse Trust. This limited recourse, revolving warehouse securitisation trust funds loan originations in the New Zealand market. Total warehouse funding on commencement of the New Zealand Warehouse Trust was $50 million, which was a combination of senior note and mezzanine note funding. The senior note funding is provided by a major bank, which initially subscribed to $35 million of senior notes. A large Australian asset manager subscribed to $9.75 million of the mezzanine notes."

---------



'Securitization' means collecting a set of like loans together and selling these packaged loans off to a third party. However, such securitzed loans would generally still appear on the Harmoney books, because any organization that buys these loans requires a guarantee that could see the loans returned to Harmoney under conditions of extreme loan stress. With loans securitzed to a third party, that means the original $50m of bank funding that Heartland provided to Harmoney can be recycled into newly written additional loans,



----------

"The New Zealand Warehouse Facility limit was increased to $100 million in May 2019, $140 million in December 2019, and $153 million in September 2020 in order to support the continued growth in Harmoney’s loan book. Harmoney has recently commenced a process to obtain a formal credit rating for the New Zealand Warehouse Trust with a global external credit rating agency. The senior financier has approved a further limit increase of the New Zealand Warehouse Facility to $200 million once the rating is obtained."

-----------



I find it astonishing that the 'warehouse funding' (securitisation) of Harmoney loans has exploded from an initial $50m to $200m in little more than a year.....



-----------

"Furthermore, in anticipation of establishing an Asset Backed Securitisation program, the rating will facilitate the ability to term out loan receivables to recycle warehouse capital. In September 2020, Harmoney also received credit committee approval from a global asset manager for up to $200 million to establish a second Warehouse Facility in New Zealand."

-----------




....and that the establishment of a 'Warehouse Facility Credit Rating' (with no indication as to what that hoped for rating might be) will immediately allow the securitization program to for Harmoney to double in size yet again, with a combined $400m facility!

So what does this mean for Heartland? It appears that going forwards Harmoney will not require Heartland's 2014 $50m cash funding commitment to grow, as Harmoney's loan book grows. That will be positive for Heartland going forwards as they manage their own limited capital base. Yet despite Heartland not having to put up more cash, Heartland will still have to raise more capital of its own to stand behind Harmoney's ever expanding and 'consolidated within Heartland' loan book, and satisfy our Reserve Bank's capital requirements for NZ banks. I think it is not so good for Heartland shareholders having to raise capital for a 'rapidly expanding part of a loan book' that you do not control!

Does Heartland's $50m funding commitment to Harmoney also explain my unanswered question (see quoted post) as to why Harmoney's full loan book appears on the Heartland balance sheet, even though Heartland is only a 10.85% shareholder in Harmoney? Up to $50m of that Harmoney loan receivables balance is directly funded by Heartland. Taking out the securitised loans (loans that have been sold off that nevertheless still appear on the loan book), that might mean that over 50% of Harmoney's loan book is funded by Heartland. Perhaps owning over 50-% of the loan book is a sufficient interest to justify incorporating that Harmoney loan book into the Heartland loan book, despite Heartland's equity ownership in Harmoney being well below the 50% threshold consolidation level for result consolidation. Anyone know?

SNOOPY

[King1212]

Had got down to just a few HGH left and a TD came due, no sense putting in the bank so today I bought the bank (@1.30).

Mention of sp of $1.70 has a nice touch about it !


patience is the key!

[nztx]

A bit more on how Harmoney gets the finance dollars to operate their business is disclosed in the Harmoney Prosoectus of 30th October 2020. This has ramifications for Heartland shareholders who were some of the earliest funders of Harmoney.

From Section 3.2.7.1 of the Harmoney Prospectus on New Zealand funding:



---------

"Prior to its New Zealand launch, Harmoney was granted the first New Zealand peer‐to‐peer licence by the FMA in 2014, creating a peer‐to‐peer marketplace that enabled retail lenders to lend to creditworthy customers. Alongside the launch of the peer‐to‐peer marketplace, Harmoney attracted $85 million of peer‐to‐peer funding from multiple institutional partners. The institutional peer‐to‐peer funding included a $50 million facility from a New Zealand bank." (Snoopy Note: I believe this NZ bank to be Heartland, consistent with Heartland's 8th September 2014 press release).

"This institutional peer‐to‐peer funding, in conjunction with the peer‐to‐peer marketplace, allowed Harmoney to successfully demonstrate the viability of its peer‐to‐peer lending model. Harmoney subsequently added three additional institutional peer‐to‐peer funders: a second New Zealand bank, a London Stock Exchange listed investment trust, and a New York-based asset manager. The terms of these commercial agreements vary but all compensate Harmoney with upfront fees paid by the peer‐to‐peer lender to Harmoney at the time the loan is funded. In addition, some peer‐to‐peer lenders also pay Harmoney a service fee and performance fee, with the potential for some of the upfront fees to be rebated by Harmoney to the peer‐to‐peer lender depending on the performance of the underlying receivables."

-------



I read that as though the funding banks (including Heartland) pay an up front fee when a loan is initiated and an extra fee on top of that if the interest charged ends up being 'above market expectations' (I am not sure what other interpretation you could put on a 'performance fee' for a loan). But also that Harmoney's 'finder fee' to Heartland will be rebated if a loan subsequently goes bad.



--------

"For the period the peer‐to‐peer marketplace was operating, approximately 20% of monthly New Zealand loan volumes were allocated to retail lenders, with the remainder, prior to the introduction of the warehouse funding model, being funded by institutional peer‐to‐peer funders."

---------



If we take the balance sheet at the end of FY2019 (30th June 2019), a 'time snapshot' where the retail peer to peer lending operation was still in full flight, we have total Harmoney lending of $NZ149.7m (NZ) + $NZ39.8m (Oz) = $NZ189.5m on the Heartland books (PR2019 p18).

So we can work out that 'institutional peer funders' funded approximately: 0.8 x $147.7 = $118m of that total. Of that sub total, Heartland will have funded up to: $50m/$118m = 42% of the institutionally backed portion of the NZ Harmoney loan book (more if you remove Warehoused loans)? This is substantially more than Heartland's 10.85% equity stake in Harmoney might otherwise suggest, if their loan book commitment and their equity stake in Harmoney were in balance.




------

"During this period, the retail peer‐to‐peer loan book grew to approximately $80 million, which was funded by approximately 10,000 retail lenders."

-------



$189.5m - $118m = $71.5m. $71.5m is 'approximately $80m'. The actual peak figure (which would be higher) would most likely have been reached after 30th June 2019 but before the wind down in the Harmoney retail peer to peer loan book was initiated later in calendar year 2019. The $80m figure would suggest that the initial expansion by Harmoney into Australia was entirely funded by retail peer to peer investors.



--------

"In December 2018, Harmoney established its second funding channel – the New Zealand Warehouse Trust. This limited recourse, revolving warehouse securitisation trust funds loan originations in the New Zealand market. Total warehouse funding on commencement of the New Zealand Warehouse Trust was $50 million, which was a combination of senior note and mezzanine note funding. The senior note funding is provided by a major bank, which initially subscribed to $35 million of senior notes. A large Australian asset manager subscribed to $9.75 million of the mezzanine notes."

---------



'Securitization' means collecting a set of like loans together and selling these packaged loans off to a third party. However, such securitzed loans would generally still appear on the Harmoney books, because any organization that buys these loans requires a guarantee that could see the loans returned to Harmoney under conditions of extreme loan stress. With loans securitzed to a third party, that means the original $50m of bank funding that Heartland provided to Harmoney can be recycled into newly written additional loans,



----------

"The New Zealand Warehouse Facility limit was increased to $100 million in May 2019, $140 million in December 2019, and $153 million in September 2020 in order to support the continued growth in Harmoney’s loan book. Harmoney has recently commenced a process to obtain a formal credit rating for the New Zealand Warehouse Trust with a global external credit rating agency. The senior financier has approved a further limit increase of the New Zealand Warehouse Facility to $200 million once the rating is obtained."

-----------



I find it astonishing that the 'warehouse funding' (securitisation) of Harmoney loans has exploded from an initial $50m to $200m in little more than a year.....



-----------

"Furthermore, in anticipation of establishing an Asset Backed Securitisation program, the rating will facilitate the ability to term out loan receivables to recycle warehouse capital. In September 2020, Harmoney also received credit committee approval from a global asset manager for up to $200 million to establish a second Warehouse Facility in New Zealand."

-----------




....and that the establishment of a 'Warehouse Facility Credit Rating' (with no indication as to what that hoped for rating might be) will immediately allow the securitization program to for Harmoney to double in size yet again, with a combined $400m facility!

So what does this mean for Heartland? It appears that going forwards Harmoney will not require Heartland's 2014 $50m cash funding commitment to grow, as Harmoney's loan book grows. That will be positive for Heartland going forwards as they manage their own limited capital base. Yet despite Heartland not having to put up more cash, Heartland will still have to raise more capital of its own to stand behind Harmoney's ever expanding and 'consolidated within Heartland' loan book, and satisfy our Reserve Bank's capital requirements for NZ banks. I think it is not so good for Heartland shareholders having to raise capital for a 'rapidly expanding part of a loan book' that you do not control!

Does Heartland's $50m funding commitment to Harmoney also explain my unanswered question (see quoted post) as to why Harmoney's full loan book appears on the Heartland balance sheet, even though Heartland is only a 10.85% shareholder in Harmoney? Up to $50m of that Harmoney loan receivables balance is directly funded by Heartland. Taking out the securitised loans (loans that have been sold off that nevertheless still appear on the loan book), that might mean that over 50% of Harmoney's loan book is funded by Heartland. Perhaps owning over 50-% of the loan book is a sufficient interest to justify incorporating that Harmoney loan book into the Heartland loan book, despite Heartland's equity ownership in Harmoney being well below the 50% threshold consolidation level for result consolidation. Anyone know?

SNOOPY


but wouldn't lending to an "Associate" have to be separately disclosed ?

The Whole Harmoney Loanbook on HGH Books ? would think they must have some form of
rights to 100% of the Loans if that were the case. As you know the HGH interest in HarMoney
is 11% roughly so HGH would not be able to consolidate Harmoney into their accounts & would
be obligated to treated it as an Associate - wouldn't they ?

With Retail Investors given the push by Harmoney - has the slack been taken up by the
Shareholders such as HGH on HarMoney funding to greater extent than we realised ?

All said & done, nevertheless - it appears if HarMoney goes IPO - HGH & Trade Me look to have
shortly be seen to have done very well indeed on their stakes in it - assuming less than 35.0 cps
share cost in 2014 presumably on their parcels ..

[King1212]

Quiet unusual trading today

[winner69]

Quiet unusual trading today

What happened kingie

[sb9]

Some 4.2mln shares changed hands today at VWAP of $1.29 a piece.

[Snoopy]

but wouldn't lending to an "Associate" have to be separately disclosed ?


Funding for Harmoney is disclosed. On p9 of the Annual Presentation for FY2020.

"Harmoney Receivables up 4.6% to $199m"

Table 9 in the Harmoney prospectus (from p104 in the Prospectus) shows statutory financial receivables of $129.222m as at 30th June 2020. That means the total Harmoney receivables on the Heartland books are greater than the total Harmoney receivables on Harmoney's own books :-O! I do not understand how this can be!

The $129.222m figure that I have mentioned ties in with the $129m of financial receivables, mentioned in the interest.co.nz article that I have referred to before.

https://www.interest.co.nz/news/1067...gging-consumer

So there is one mystery solved at least I now know where interest.co.nz got their figure of $129m of Harmoney receivables from.

But something is not right here. That June 2020 Harmoney balance sheet also contains $344.129m of 'Peer to Peer funded loans'. That $344m represents loans funded by the 'Mum and Dad' and Wholesale 'peer to peer' funders to other 'Mums & Dads. But all the peer to peer funders also need to be repaid at some point. Harmoney is paid by those 'peer to peer ' lenders who put up money to make loans Harmoney also collects money from those borrowers who end up with the loan money. Harmoney is 'clipping the ticket' on both the borrowing and lending side of each transaction. But is the on lent loan money a financial receivable asset from a Harmoney perspective?

According to the aforementioned 'Table 9', after the Harmoney share offer is complete, all of those previously peer to peer funded loans will become ordinary financial receivables. In the course of this transition, the Harmoney loan book suddenly swells from $129.222m of loans to:

$129.222m + $344.129m = $473,351m

of financial receivables loans. This seems a very odd thing to happen. There has been no underlying change in the loans made to end line customers. Yet 'suddenly' the loan book increases in size by 366%. Does the transition from being a 'peer to peer' lender to just being a 'regular finance company' lender require the loan book to be revalued upwards in such a dramatic fashion?



The Whole Harmoney Loanbook on HGH Books ? would think they must have some form of rights to 100% of the Loans if that were the case. As you know the HGH interest in HarMoney
is 11% roughly so HGH would not be able to consolidate Harmoney into their accounts & would be obligated to treated it as an Associate - wouldn't they?


I cannot fault your logic nztx. By my understanding of company accounting rules, you must have a 50% controlling stake in a subsidiary before you can consolidate such accounts within the parent company results. The shareholding of Harmoney owned by Heartland clearly does not qualify for this treatment. So how do you explain $199m of Harmoney receivables recorded on the Heartland books? Mystery not solved!



With Retail Investors given the push by Harmoney - has the slack been taken up by the Shareholders such as HGH on HarMoney funding to greater extent than we realised ?


A wholesale peer to peer funder will replace a retail peer to peer funder by taking up 100% of that loan. Once a retail peer to peer holder relinquishes their loan to a wholesale provider then 100% of that loan is relinquished. There is no variable percentage number here. So I am not quite sure what you mean when you say:

"(Perhaps) the slack been taken up by the Shareholders such as HGH on HarMoney funding to a greater extent."



All said & done, nevertheless - it appears if HarMoney goes IPO - HGH & Trade Me look to have shortly be seen to have done very well indeed on their stakes in it - assuming less than 35.0 cps share cost in 2014 presumably on their parcels ..


Agreed, although this will be a one off gain for Heartland. I wouldn't be building in any such gain into the profit i recognize as ongoing for the company.

SNOOPY

[Snoopy]

While the other Beagle is extremely busy barking loud and very long I have been extremely busy biting over and over again...chunks of shares off the sellers. I wonder which will be the more profitable approach lol

My rating for HGH is BBB+ (Beagle Busy buying) :)


Some 4.2mln shares changed hands today at VWAP of $1.29 a piece.

We now know the answer. The other Beagle was buying at up to $1,37 just a month ago. The Snoopy beagle has been topping up at $1.28 today. I feel as though it is a good day if I can get one up on that other Beagle! But in the long term I predict that both Beagles will do well with HGH!

SNOOPY

[nztx]

Interesting postings - Snoopy

Especially the sudden & very rapid growth in Harmoney Loan Book

Revaluation of Loan book would have to be based on economic conditions vastly improving
then may relate only to degrees of impaired loans becoming recoverable (reversing earlier
provisions or write-off's)

I dont see blue air territory on a Loan Book & not in current times either

Could this possibly be due to Harmoney taking onboard another country - such as Aussie ?

[King1212]

Seem like fundies are accumulating..

[Snoopy]

Interesting postings - Snoopy

Especially the sudden & very rapid growth in Harmoney Loan Book


Check out the 'revaluation' of the loan book in Table 9 on page 104 of the Harmoney Prospectus that you can get from the link below :

https://events.miraqle.com/FormBuilder/_Resource/_module/hHqoUFGw6ESQTYkD-NOd0w/file/Harmoney_Prospectus.pdf



Revaluation of Loan book would have to be based on economic conditions vastly improving then may relate only to degrees of impaired loans becoming recoverable (reversing earlier
provisions or write-off's)

I don't see blue air territory on a Loan Book & not in current times either

Could this possibly be due to Harmoney taking onboard another country - such as Aussie ?


I have obviously not made my point clearly. The sudden revaluation of the Harmoney loan book has nothing to do with economic conditions, impaired loans or the quality of the loan book either now or into the future. If you look at Table 9 in the Harmoney Prospectus, then you will see that the 'finance receivables' growing from $129,222m to $473,351m overnight is a bookkeeping exercise. It is, I believe, caused by bringing what were previously 'off the book loans' (managed directly between peer to peer lenders and borrowers) directly into the Harmoney loan book instead.

Looked at this way, the concomitant statement in the prospectus in section 3.7.2.1 that I have already quoted below:




----------

"The New Zealand Warehouse Facility limit was increased to $100 million in May 2019, $140 million in December 2019, and $153 million in September 2020 in order to support the continued growth in Harmoney’s loan book. Harmoney has recently commenced a process to obtain a formal credit rating for the New Zealand Warehouse Trust with a global external credit rating agency. The senior financier has approved a further limit increase of the New Zealand Warehouse Facility to $200 million once the rating is obtained.

Furthermore, in anticipation of establishing an Asset Backed Securitisation program, the rating will facilitate the ability to term out loan receivables to recycle warehouse capital. In September 2020, Harmoney also received credit committee approval from a global asset manager for up to $200 million to establish a second Warehouse Facility in New Zealand."

-----------



outlining an expansion is Harmoney's current warehousing facility can be seen in a new light. Expanding 'Warehouse 1' from $153m (all except $20m of this facility has been utilised to 30-09-2020, see Harmoney Prospectus p26) to $200m, and adding a second new NZ warehousing facility of $200m may not be signalling a sudden expected growth spurt in the NZ loan book after all. Instead these new Warehousing facilities may be needed to transition the existing loan book away from its peer to peer funded model to an in house funded model with no loan book growth. IOW the 'grand expanded warehouse funding plan' outlined in the Harmoney prospectus is not indicative of any future growth after all!

SNOOPY

[Snow Leopard]

Snoopy. It looks like you are beginning to get a grip on the Harmoney funding transition.

With regard to Heartlands $199 of Harmoney receivables vs Harmoneys $129 of receivables: They are not the same thing.

Heartland is a peer-to-peer lender through the Harmoney platform and the $199 is part of the $344.

So the question is: What happens to that $199 (from Heartlands view point) over the next year or so as Harmoney unwinds the p2p?

[Snoopy]

Snoopy. It looks like you are beginning to get a grip on the Harmoney funding transition.

With regard to Heartlands $199 of Harmoney receivables vs Harmoneys $129 of receivables: They are not the same thing.

Heartland is a peer-to-peer lender through the Harmoney platform and the $199 is part of the $344.

So the question is: What happens to that $199 (from Heartlands view point) over the next year or so as Harmoney unwinds the p2p?


I was going to say the p2p unwinding at Harmoney makes no difference to Heartland, It is only the retail part of p2p that is being unwound and the big boys like Heartland doing the wholesale funding just carry on. But on closer reading of the Harmoney Prospectus, I see that the wholesale peer to peer funding is being unwound as well! So I guess the answer is that all of that $199m in loans to Harmoney will be repaid. I imagine Heartland would have had the option of getting involved in one or more of these finance receivable warehousing operations that will ostensibly replace the peer to peer lending. However, to my knowledge they have so far declined to do so. From the Harmoney prospectus p74.

"In December 2018, Harmoney established its second funding channel – the New Zealand Warehouse Trust. <snip> The senior note funding is provided by a major bank (not Heartland then!), which initially subscribed to $35 million of senior notes. A large Australian asset manager subscribed to $9.75 million of the mezzanine notes."

"In September 2020, Harmoney also received credit committee approval from a global asset manager (not Heartland then!) for up to $200 million to establish a second Warehouse Facility in New Zealand."

I am slightly surprised at this because under the new warehouse funding model (Harmoney Prospectus p72), Heartland would transfer the "impairments for losses on loan receivables" to Harmoney and that would de-risk Heartland's own position in the loan operation. Given Heartland -apparently- do not want to continue operational involvement at Harmoney, I have to conclude that they have decided to make better use of their capital elsewhere. And that probably means they will sell down their equity position over the medium term within Harmoney as well, in my view. Personally I am not enamoured with the Harmoney target market for loans, particularly in post Covid-19 times. And I would be quite glad for Heartland to exit this kind of lending.

AFAIK Heartland have retained the arrangement whereby they granted $50m in wholesale funding to Harmoney when it was getting going. It will be up to Harmoney to see if they can get a better deal elsewhere with another bank.

SNOOPY

[Beagle]

Given Heartland do not want to continue operational involvement at Harmoney, I have to conclude that they have decided to make better use of their capital elsewhere. And that probably means they will sell down their equity position over the medium term within Harmoney as well, in my view. Snoopy

I hope so. More money and much less risk in lending money to old and trustworthy homeowners with zero risk of default.

[nztx]

I hope so. More money and much less risk in lending money to old and trustworthy homeowners with zero risk of default.


but the strategy to of realising a maturing equity interest seems like a better option than a SP depressing Cap Raise
as in past to put some further Shareholders funds on the Books

[Snoopy]

I was forecasting a proposed 'one off shock' at the end of FY2020 which looks to have happened. My forecast EOFY2021 decline of 10% for the O4B receivables from an EOFY2019 base level, is equivalent to a 23% fall from the EOFY2020 base level. Too harsh?

I see from the IRD website:

https://www.ird.govt.nz/covid-19/business-and-organisations/small-business-cash-flow-loan

-------

Latest developments

The Small Business Cashflow (loan) Scheme has been extended until the end of 2020. Applications opened on 12 May 2020 and can now be submitted up to and including 31 December 2020.

-----------

So I think I am justified in holding my assumptions about the decline in O4B. No small business owner in their right mind is going to get a business loan from Heartland if they can get one from the IRD at 0%. That means very little new O4B business will be written for the first half of FY2021 at Heartland Bank!


The new Labour government looks to have put supporting small business at the top of their agenda

https://www.newsroom.co.nz/small-business-loans-flexi-wage-top-of-govt-to-do-list

--------

With little time to lose, Ardern said her new Cabinet’s first item of business would be improving the small business loan scheme, originally designed as a “stop-gap” for vulnerable Kiwi companies. Given ongoing uncertainty and instability, the Government now proposed to extend the scheme for three years, also extending the interest-free period for loans from one year to two years.

Later in the month, ministers would put forward proposals to expand the potential purposes of the scheme, covering investments in new equipment or infrastructure. Ardern said the Government also wanted to start work on new financial mechanisms to support small businesses, such as expanding the mandate of its Venture Investment Fund.

“We need to find long-term solutions to a problem that actually existed before Covid arrived on our doorstep,” she said.

----------

Business loans over two years with no interest payments required are a pretty difficult product for Heartland to compete with.

SNOOPY

[Beagle]

Jarden been engaged to look at financial engineering. Got to get this up to a fintech PE. Can't help wondering if they realise almost all other banks are pursuing a full digital strategy ?

I think they start to lose credibility when they try and argue that a fintech multiple is more appropriate. If they think the shares are so cheap do a massive on market buy-back. Less talk from them and more action I reckon.

[Beagle]

Further to the above post I would just add that TSB bank have moved rapidly to everything digital and I was chatting with a lawyer who works for Westpac this morning and he told me they're moving as fast as they can to all things digital.

So Winner me ol mate, do you still think HGH deserves to trade on special metrics because they're a special case with all things digital or have the directors "lost it" thinking they're a special case and spending (probably hundreds of thousands, a million or two ?) engaging Jarden to review their options ? What say you ?

My opinion is that with the niches they have carved out for themselves in the market and the highest NIM in the market they at least should trade on the average forward metrics of the Australian banks I follow which suggests, (last time I looked), that HGH are very cheap.

[Greekwatchdog]

They are going hard - Floating rate 2.5% ...https://www.nzx.com/announcements/362840

[winner69]

They are going hard - Floating rate 2.5% ...https://www.nzx.com/announcements/362840

Get the 2.5% and all done on line in the blink of an eye .....easy peasy

Do they ask for more than your name and address when you apply?

Probably need your solicitors name for the paperwork?

[peat]

Get the 2.5% and all done on line in the blink of an eye .....easy peasy

Do they ask for more than your name and address when you apply?

Probably need your solicitors name for the paperwork?

hopefully some proof of income too!
Its all good to lend money but gotta get it back!

[Greekwatchdog]

Jeff Greenslade comments.https://www.nzherald.co.nz/business/mortgage-wars-heartlands-floating-home-loan-rate-dropped-to-record-low-25pc/FAAK6E535EKYKROCFLLG4TGXSA/

[King1212]

Vaccine is successful.. will see covid bad debts less risky

Us n europe banks are up 15 persen

$1.80...here we come!

[bung5]

Vaccine is successful.. will see covid bad debts less risky

Us n europe banks are up 15 persen

$1.80...here we come!



Wow US banks up 15% , should be a great day :)

[Beagle]

Smaller regional banking index in the US up 17%
Banks have a very high Covid beta. Good news should flow through to HGH's share price and if it doesn't I am a buyer of more.

[Ggcc]

I’m guessing $1.40-$1.42 close tonight any other punters

[Ltw]

Interestingly I've had both ANZ and Westpac on the phone this morning reminding me that my fixed interest period is coming due and would i like to get anything ready today!!
They must be getting nervous.
Edit:
both have now called twice, call centres first then local branch's

And Emails from ANZ, BNZ and Westpac gee I'm feeling important today :cool:

[Bjauck]

Smaller regional banking index in the US up 17%
Banks have a very high Covid beta. Good news should flow through to HGH's share price and if it doesn't I am a buyer of more.It has got a lot of catching up to do. Even given the performance so far today, I think it has underperformed the NZX50 by at least 22% in the past 12 months and 30% in the last two years.

When it listed as HGH on 31 October 2018 on the NZX the price was $1.54 I think.

Disc: long time holder of HGH and HBL

[stoploss]

Interestingly I've had both ANZ and Westpac on the phone this morning reminding me that my fixed interest period is coming due and would i like to get anything ready today!!
They must be getting nervous.
Edit:
both have now called twice, call centres first then local branch's

And Emails from ANZ, BNZ and Westpac gee I'm feeling important today :cool:
You should be able to achieve 2.39 % 1 year fixed .

[Beagle]

It has got a lot of catching up to do. Even given the performance so far today, I think it has underperformed the NZX50 by at least 22% in the past 12 months and 30% in the last two years.

When it listed as HGH on 31 October 2018 on the NZX the price was $1.54 I think.

Disc: long time holder of HGH and HBL

I agree 100%. Banks have a very high Covid beta and HGH is on compelling metrics for FY21 and beyond. By the companies own forecast they are on for earning 14.5 cps in FY21 so the forward PE is only 9.3 which is well and truly out of whack with the metrics the Australian banks I follow are now on. I bought more yesterday and have the highest number of shares I have ever held. I feel very well positioned and have high expectations of a strong rerating in 2021.

[Bjauck]

Interestingly I've had both ANZ and Westpac on the phone this morning reminding me that my fixed interest period is coming due and would i like to get anything ready today!!
They must be getting nervous.
Edit:
both have now called twice, call centres first then local branch's

And Emails from ANZ, BNZ and Westpac gee I'm feeling important today :cool: Had a call from Westpac too reminding me a TD was maturing. I will be cancelling the rollover and instead buy HGH.

[bung5]

I also did the same. HGH TD to HGH shares.

[Beau]

With the increasing house prices must make Heartland reverse mortgage look more compelling for both borrowers and lender , surely should reflect in share price .

[Beagle]

Vaccine is successful.. will see covid bad debts less risky

Us n europe banks are up 15 persen

$1.80...here we come!

Financials do have a very high Covid beta as they are very sensitive to the economic effects of Covid on their customers and the opposite, to the recovery prospects that vaccines give hope for so its is very surprising to note that while many US, European and Australian financials have rebounded strongly on the hopes of the Pfizer vaccine and yesterday's Modera vaccine with an even higher efficacy at 94.5% HGH has been stuck pretty much in the doldrums.

For many years now I have compared the forward metrics to HGH's peers in Australia and found a very close correlation. Its not often that HGH's forward PE is more or less than 2 different to the average of its peers so imagine my surprise when I noted yesterday that based on HGH's official forecast at the midpoint of $84m = 14.4 cps HGH are currently on a forward FY21 PE of just 9.4 !
This compares with peers as follows, (all figures are average analyst forecasts off market screener)
ANZ 13.3
WBC 13.4
NAB 15.8
BEN 14.3
BOQ 14.4
CBA 18.2
Peer Group Average 14.9

Leaving aside the outlier of this group CBA which for reasons unknown is also trading at about twice NTA this still gives an average forward PE for the Australian banks of 14.25.
In my experience HGH's normal trading range on a forward PE basis is 11 - 17.5 with the mid point also being 14.25.

I have never seen HGH trade at a discount of this size to its peer group, nothing remotely like it so this presents as a real overlooked recovery story.

I think as 2021 unfolds and the recovery story and vaccinations get rolled out HGH has excellent prospects to recover towards the mid point of its historical PE range which is where the Australian banks already are.

14.25 x officially forecast of 14.4 cps = Target Price of $2.05. I think HGH has excellent prospects to make a strong recovery in 2021. I already have a sizeable position and added some more this morning.

I note the RBNZ dividend restrictions still apply so I am only expecting 5 cps (6.94 cps gross) in fully imputed dividends in the year ahead which gives a gross yield of 6.94 / 137 = 5.1% but I am expecting that to approximately double for FY22 and beyond and on a look through Covid recovery basis HGH could give a 10% Gross Yield in FY22

[percy]

For someone good at maths.?
Medium price for an Auckland house is approx $1 mil.
70 year old borrows using a HGH REL a thousand dollars a week to spend.His house is worth currently $1mil.
Lives 10 years .So would owe $520,000 plus interest at 3% just under $70,000.
I would guess his house goes up $2,000 a week.So house is worth over $2mil when he dies.
His estate would be $2mil less what he owes HGH $590,000 ie Leaving $1,410,000.
Certainly beats selling the house for $1mil and buying a $1mil unit at The Sands.

[Beagle]

Plenty of people seem to think so Percy with the massive growth in reverse equity loans !
The numbers on page 23 tell a real story about what the size of this part of their business has grown too and I expect very strong growth in the years ahead. http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/362278/333910.pdf

From a financial viewpoint retirement living is a terrible investment but from a lifestyle perspective many people think its the best thing they ever did ! I know my Mum has enjoyed a fabulous 11 years at her retirement village and been so incredibly happy and well supported there...I couldn't care less that I will inherit less, her happiness in her sunset years is all that matters to me.

[winner69]

Re HGH v the peer group Beagle uses (Aussie banks)

I've always said Price/NTA is a better multiple to use than PE ratios for banks. Allows for different leverage and things. (Note: in reality prefer using Book Value instead of NTA but can't be bothered looking them all up for this exercise)

So I've compared the HGH peer group based on Price/NTA multiples (ex Direct Broking) - they are shown on the chart below.

I've dome this exercise a few times over the years and found that the average has always been around 1.3 plus or minus a bit and that HGH except for those totally irrational exuberant times the HGH share price has been over 2 bucks and was heading that way has been close to the average of its peers.

I don't see HGH going to 2 bucks soon - unless HGH con the market into thinking they really are a fintech stock

[winner69]

one could say if you take CBA out HGH are one of more highly valued stocks in the peer group

[Snoopy]

For someone good at maths.?
Medium price for an Auckland house is approx $1 mil.
I would guess his house goes up $2,000 a week.So house is worth over $2mil when (after ten years).


How things have turned:

Old days

Woman sends man out of the house to earn the money.

Turn of the Century

Woman and man both go out of the house to earn money.

2020

House sends man and woman out of the house so that it can earn the money!

SNOOPY

[percy]

Plenty of people seem to think so Percy with the massive growth in reverse equity loans !
The numbers on page 23 tell a real story about what the size of this part of their business has grown too and I expect very strong growth in the years ahead. http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/HBL/362278/333910.pdf

From a financial viewpoint retirement living is a terrible investment but from a lifestyle perspective many people think its the best thing they ever did ! I know my Mum has enjoyed a fabulous 11 years at her retirement village and been so incredibly happy and well supported there...I couldn't care less that I will inherit less, her happiness in her sunset years is all that matters to me.

I totally agree with you.
What is interesting is those people who choose to remain in their own home,can make good use of RELs ,without worrying they are going to leave their estate with nothing.

[Jantar]

….
I've always said Price/NTA is a better multiple to use than PE ratios for banks. …..
There are a number of ways to value a stock. PE as per Beagle, Price/NTA as per W69, reading tea leaves as FB seems to use. Personally I prefer to look at the divends and establish a price that will give me a return, purely on dividends, of 5% after tax. On that basis I have a fair value for HGH of $1.67. So somewhat less than Beagle's value but still ahead of W69.

[Beagle]

Re HGH v the peer group Beagle uses (Aussie banks)

I've always said Price/NTA is a better multiple to use than PE ratios for banks. Allows for different leverage and things. (Note: in reality prefer using Book Value instead of NTA but can't be bothered looking them all up for this exercise)

So I've compared the HGH peer group based on Price/NTA multiples (ex Direct Broking) - they are shown on the chart below.

I've dome this exercise a few times over the years and found that the average has always been around 1.3 plus or minus a bit and that HGH except for those totally irrational exuberant times the HGH share price has been over 2 bucks and was heading that way has been close to the average of its peers.

I don't see HGH going to 2 bucks soon - unless HGH con the market into thinking they really are a fintech stock

Yeah I worked that out too mate but didn't share it because I knew you would, you're as predictable as a Swiss watch sometimes :p Unsurprisingly I prefer my methodology because it takes into account the return on capital, (net assets) employed in the business. Its all very well having assets but if your net interest margin is half that of HGH you need twice as many to get the same return ! Remind me again, who sold at $2.14 when someone else was calling for $2.50 and what was the top price ? :p

[winner69]

Yeah I worked that out too mate but didn't share it because I knew you would, you're as predictable as a Swiss watch sometimes :p Unsurprisingly I prefer my methodology because it takes into account the return on capital, (net assets) employed in the business. Its all very well having assets but if your net interest margin is half that of HGH you need twice as many to get the same return ! Remind me again, who sold at $2.14 when someone else was calling for $2.50 and what was the top price ? :p

I recall it was you ...Beagle ....who sold at $2.15 knowing it was never going to go $2.50. Very canny of you.

And by the way Price/BV implicitly has a ROE component along with growth, required returns and payout ratios.

Do you think the high payout rate (dividend) is a drag on long term share price growth?

[Beagle]

Yeah somewhat but those dividends are awesome.
HGH is currently priced like an abandoned baby ;)

[nztx]

Yeah somewhat but those dividends are awesome.
HGH is currently priced like an abandoned baby ;)


Wait until the Reserve Bank handbrake comes off the bank dividends though .. ;)

[Norwest]

Fantastic posts winner and Beagle, very good reading and data to back it up.

re: CBA as an outlier in both your postings

Based on the capital ratios as I detailed on here on this thread: https://www.sharetrader.co.nz/showthread.php?8425-HGH-Heartland-Group-Holdings&p=845234&viewfull=1#post845234

Here is a good read around BAC and Buffet's position on it: https://www.fool.com/investing/2020/08/03/why-is-warren-buffett-boosting-his-investment-in-b.aspx once you've read that article, I think its safe to ascertain that CBA is the Bank of America with regards to Australia/NZ.

One thing that would certainly re-rate HGH's Shareprice higher is improving these capital ratios.

[peat]

HGH is currently priced like an abandoned baby ;)

Dont think I didnt notice this irreverent and meaningless comment :mad ;:


:p

[King1212]

Let it be abandoned baby..so I can keep accumulating

[Beagle]

Forward PE of just 9.4 is just nuts when two major vaccine trails have shown extremely encouraging efficacy. HGH is the gift you give yourself this Christmas for a very happy 2021. :t_up:

[King1212]

Best Christmas gift ever...can not get enough...keep buying...might sell all properties n buy more hgh

[winner69]

Fantastic posts winner and Beagle, very good reading and data to back it up.

re: CBA as an outlier in both your postings

Based on the capital ratios as I detailed on here on this thread: https://www.sharetrader.co.nz/showthread.php?8425-HGH-Heartland-Group-Holdings&p=845234&viewfull=1#post845234

Here is a good read around BAC and Buffet's position on it: https://www.fool.com/investing/2020/08/03/why-is-warren-buffett-boosting-his-investment-in-b.aspx once you've read that article, I think its safe to ascertain that CBA is the Bank of America with regards to Australia/NZ.

One thing that would certainly re-rate HGH's Shareprice higher is improving these capital ratios.

Thanks norwest for reminding us of that post and good point you raised re hgh

[King1212]

Revaluation of HGH..will see sp will also be re rated