Dividend Capitalised Valuation: The Data: FY2020 perspective (Iteration 2)
Quote:
Originally Posted by
Snoopy
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
FY2013 |
1.5cps(sp) + 2.0cps |
17th December 2012: Heartland becomes a bank |
FY2014 |
2.5cps + 2.5cps |
1st April 2014: Seniors 'Reverse Mortgage' Business Acquired |
|
|
FY2015 |
3.5cps + 3.0cps |
10th September 2014: invests in Harmony P2P startup |
|
|
28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) |
FY2016 |
4.5cps + 3.5cps |
FY2017 |
5.0cps + 3.5cps |
FY2018 |
5.5cps + 3.5cps |
FY2019 |
5.5cps + 3.5cps |
1st November 2018: Heartland Group Holdings restructure set up |
FY2020 |
6.5cps + ?.?cps |
|
Average FY2015.5 to FY2019.5 inclusive |
8.80cps |
|
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.
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
FY2013 |
1.5cps(sp) + 2.0cps |
17th December 2012: Heartland becomes a bank |
FY2014 |
2.5cps + 2.5cps |
1st April 2014: Seniors 'Reverse Mortgage' Business Acquired |
|
|
FY2015 |
3.5cps + 3.0cps |
10th September 2014: invests in Harmony P2P startup |
|
|
28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) |
FY2016 |
4.5cps + 3.5cps |
FY2017 |
5.0cps + 3.5cps |
FY2018 |
5.5cps + 3.5cps |
FY2019 |
5.5cps + 3.5cps |
1st November 2018: Heartland Group Holdings restructure set up |
FY2020 |
6.5cps + 0cps |
|
Average FY2016 to FY2020 inclusive |
8.20cps |
|
We are more than six months out from any expected final dividend. But I am going to make the bold prediction that there will not be one. What does this do to the Dividend Capitalised valuation of HGH? First see what the five year dividend average is.
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.
SNOOPY
Dividend Capitalised Valuation: The Calculation: FY2020 perspective (Iteration 2)
Quote:
Originally Posted by
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 )
8.8c / (0.72 x 0.075) = $1.63
A reminder here that NTA was
($675.668m - $72.679m) / 569.338m = $1.06 cps
at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.
This $1.63 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 range of $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.
Events have certainly moved on since my FY2019.5 year calculation. I have to ask the question, given the economic shock, should I still be happy with a 7.5% yield from a second tier financial institution? My initial thought was no. But then I realised that coming out of this, interest on bank term deposits are likely to be materially lower than the all time lows we have been experiencing of late. We might even be faced with a generation who do not know what interest is, because no bank pays it anymore! So I have decided my 7.5% figure is still appropriate. 7.5% does reflect a higher risk in an even lower interest rate environment going forwards!
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 )
8.2c / (0.72 x 0.075) = $1.52
A reminder here that NTA was
($675.668m - $72.679m) / 569.338m = $1.06 cps
at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+43%) to net tangible asset value.
This $1.52 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 range of $1.22 to $1.82. $0.95, where the share is trading today, is 37.5% below fair value. My target accumulation price (10% below fair value) is now $1.37. But is any of this realistic in the current investment climate?
SNOOPY
P.S. This iteration assumes no 4.5c March 2020 dividend which is not what happened. Refer back to Iteration 1 (post 13004) for a better valuation.
HGH: What's it really worth?
Quote:
Originally Posted by
Snoopy
(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )
8.2c / (0.72 x 0.075) = $1.52
A reminder here that NTA was
($675.668m - $72.679m) / 569.338m = $1.06 cps
at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+43%) to net tangible asset value.
This $1.52 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 range of $1.22 to $1.82. $0.95, where the share is trading today, is 37.5% below fair value. My target accumulation price (10% below fair value) is now $1.37. But is any of this realistic in the current investment climate?
It is at times like this that the crudeness of the 'capitalised dividend valuation' model is useful, because it is so transparent.
Dividends paid in the past are indicative of the past business environments in which those dividends were paid. Clearly future business environments, for the medium term at least, are likely to be less favourable than those of the last five years. But how much worse?
I fear for the financing of new vehicles. The fact is that those running around in a five year old Japanese car will be disadvantaged very little compared to running around in a brand new equivalent, in practical terms. Yes they will pay a bit more for fuel. But for those that haven't noticed, the price of fuel has come down quite significantly in the last month. This morning I heard that demand for Air Travel within NZ has fallen 99%. I wonder what the fall in demand for rental cars is? Are rental car companies, one of the largest buyers of new cars, even still operating?
A shake out in small business is underway as well. But rather than a panicked risk averse 'pulling out of the rug', I expect a much more measured working through of the issues. Operators, landlords, banks and the government will all need to come to the party. After the initial shake out, I see a good future for financing SMEs in New Zealand.
Livestock funding's future is looking good as the four bigger banks look to wind down their rural exposure in New Zealand. The need for reverse mortgages looks to be even greater than before.
Overall I think HGH has a strong future if they can get through the current period. And the government is there, guaranteeing loans and subsidising incomes, to make sure that it does.
My guess, and it is nothing more than that, is that a new lending market, maybe 80% of the size of what was there BC19 (Before Covid 19), will emerge. That means that all my target prices have to be multiplied by a factor of 0.8. I also think that given the current volatility in share prices, potential shareholders should be able to accumulate at 20% below fair value, not just 10%. So how does my HGH valuation stack up given those changes?
(0.8 x8.2c) / (0.72 x 0.075) = $1.22
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 range of $0.98 to $1.46.
My target accumulation price (20% below fair value) is now $0.98. With the share trading at 92c as I write this, it is definitely 'in the accumulation zone', IMO!
SNOOPY
discl: hold HGH, and is nevertheless not accumulating until my next term deposit rolls off at the end of the month!