Heartland Profit Forecast: FY2021 & FY2022 (Scenario 2)
Quote:
Originally Posted by
Snoopy
Let me reprise what assumptions I have built into my own valuation modelling for Heartland (under Scenario 1)
1/ Reverse Mortgage market flat.
2/ A 45% reduction in New Vehicle funding, coupled with no reduction in used vehicle funding. A lot of that is due to the end of Holden, which was by far the largest new vehicle funding partner for Heartland.
3/ The effective closing down of O4B small business funding for three months (because O4B can't compete with 0% interest rate loans from the IRD) with O4B recovering to 90% of base level after that.
4/ 'Business Intermediated' loans will likewise shrink by 10%.
5/ Business Relationship loans will decline by 16% for two years, because Heartland indicated pre-Covid they were wanting to wind back this side of the business.
6/ Rural earnings steady.
7/ The collapse of Harmoney, the unsecured consumer loan lender, in about a year's time.
I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.
Reverse Mortgages
I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:
FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m
We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.
FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m
Motor Vehicle Finance
My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.
FY2021/2022: -$75m x 0.15 = -$11m
Because I am modelling finance deals with a three year life, this annual loss compounds.
Business Finance
No change
Rural finance
No change
Harmoney and Other Consumer Lending
The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:
0.131 x $367m = $48m
At a 15% return on this loan money, this level of lending would produce:
0.15 x $48m = $7.2m of annual profit.
I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.
|
FY2021 |
FY2022 |
Baseline Reference Profit |
$74.5m |
$74.5m |
Reverse Mortgage Adjustment |
$18m |
$23m |
Motor Vehicle Finance Adjustment (New) |
($11.4m) |
($17.1m) |
Motor Vehicle Finance Adjustment (Used) |
($11.0m) |
($22m) |
Business Finance (Part 1) Adjustment |
($5.3m) |
($2.1m) |
Business Finance (Part 2) Adjustment |
($15.5m) |
($15.5m) |
Rural Finance Adjustment |
$0m |
$0m |
Harmoney and Other Consumer Lending Adjustment |
($3.6m) |
($3.6m) |
Total Forecast NPAT |
$45.7m |
$37.2m |
No. Shares on Issue |
581.0m |
581.0m |
Earnings Per Share |
7.9cps |
6.4cps |
SNOOPY