HMY - Harmoney Corp Limited

**Muse** · 28-04-2022, 03:05 PM

Originally Posted by jimdog31

hey moose, in your workings, have you looked into what potential credit losses flow from the 90 day arrears?

how do they calculate the 0.46% of arrears ? is it based on total book value? I guess while the loan book value is increasing qoq its easy for this figure to come down as the base thats being calculated against is increasing?

Whats your best guess at incurred credit losses for 2022 and 2023? (all things being equal, not necessarily weighting 2023 higher based on the current state of the world)

I also think harmoney has a pretty good shot at reaching/surpassing a $700m gross receivables book by the end of june. even when updating for further QoQ declines in NZ originations

**jimdog31** · 27-04-2022, 12:53 PM

Originally Posted by Ggcc

If things are progressing better than expected and it looks so wonderful. Why are HGH not buying more shares if this share is perceived undervalued?

theyll have internal limits on weighting of investments. No different to the big banks weighting in particular sectors ie rural, commercial, residential

**Rawz** · 27-04-2022, 01:17 PM

Heartland probably will be looking at an exit FY23+ once the peer to peer lending is well and truly gone and HMY is tuning out a solid 8 figure profit

Like FM says they will need the capital for their bank requirements and also they now have a good pathway of expansion into Aus with reverse mortgages + livestock. Next step asset finance. so best to put the money into that growth one would have thought. rather than a slice of another listed company

One thing for sure is HGH will be wanting over $2 for their holding.

**Rawz** · 27-04-2022, 07:39 PM

Originally Posted by jimdog31

hey moose, in your workings, have you looked into what potential credit losses flow from the 90 day arrears?

how do they calculate the 0.46% of arrears ? is it based on total book value? I guess while the loan book value is increasing qoq its easy for this figure to come down as the base thats being calculated against is increasing?

Whats your best guess at incurred credit losses for 2022 and 2023? (all things being equal, not necessarily weighting 2023 higher based on the current state of the world)

When they say 0.46% that will be of the total book. So customer payments are behind $2.8m ish and have been behind for 90+ days.

Then there will be payments behind for less than 90 days and this % will be higher than 0.46% But most of them will be caught up before they get to 90 days.. Under 90 days include some arrears that would never actually result in a credit loss. For example an A+ borrower changing banks and forgetting to update their direct debits.. this is why 90 day arrears is what is reported. It captures those that are most likely to lead to a credit loss.

HMY will of course attempt to work out an arrangement with the customers in arrears.. often this will work. Could just be a customer in-between jobs for example. If it looks bad a provision will be placed on the account. I.e. HMY guesses how much they will lose on it. If no resolution HMY will write off the debt (impairment expense) and send it off to TRAs debt collection agency (or similar).

FY21 impairment expense was 4% of avg book or $18.6m
FY22 impairment should be close to 3.8% of avg book so ~$22m
FY23.. best to watch unemployment numbers. Hmy says that will be the best guide to how the book will perform. Or lets see the provision rate in FY22 annual report. Maybe they increase it

Im going off the proforma numbers.. FM will have a much better idea on the real numbers, he's a very smart Moose..

**Ggcc** · 27-04-2022, 09:21 PM

Originally Posted by Fiordland Moose

Well HGH did buy more last year but us cynics will have a view on the underlying reason for that. But I'd say two areas

Modestly rising interest rates are net net a positive for financial institutions. Rapidly rising inflation and rapidly rising interest rates (that still aren't keeping up with inflation) aren't. If discretionary spending turns off people won't need as many loans or harmoney's service. More relevant are inflations impact on peoples ability to service their debts and later on if interest rates create higher levels of unemployment - both those influence incurred credit losses, which impacts the bottom line. The wholesale funding HMY and other instos rely on also have certain credit quality covenants, which if breached could see undrawn funding lines withdrawn. Stagflation is getting mentioned more and more, so not surprising to see sentiment wane.

The other item is Heartland is a capital constrained business. It has prudential capital adequacy rules it must follow. It pays out high levels of profit in the form of dividend. And they recently acquired an australian business and probably debt funded it which may reduce their last reported capital adequacy stats. The capital adequacy requirements are lifting and its possible in a few years heartland may have to either reduce their dividend payout ratio or raise capital (or some combination of both) in order to meet them. So probably not the best use of its scarce resources to further invest into an early stage, high risk fintech that won't be paying dividends for the new several years.

See post 506 for more on heartland - one that I have a personally meaningful position in and doing a lot of work on in a personal capacity.

EDIT - apols on re-reading I know that all read negatively, not my intention on a day where the q3 release had excellent credit stats and record growth etc and not saying stagflation is going to happen, just how the market may perceive it and how it could impact the business. and i think its good to have eyes wide open at the moment

Thanks for your well explained opinion.

I do agree that HGH recent purchase might hold back any opportunity to invest elsewhere, unless they capital raised beforehand.

If Harmony are doing well it will benefit shareholders and HGH shareholders. I just believe if Harmony are doing better HGH should jump on board with more shares and maybe capital raise.

Of course that is a story for another day.

**Rawz** · 30-04-2022, 11:13 AM

Hey Jimdog i largely agree with your thesis. Especially potential takeover target, lets hope it doesn't get to that though.. this should be a very good long term compounder.

I have invested in HMY because i believe they have the best model out of all the new fintechs on the block. All of HMYs competitors like plenti, moneyme, wisr etc use brokers (as well as going direct to market). HMY have chosen a direct to consumer model. This model is scalable globally. They have built (and continue to refine) Stellare which is the technology that profiles potential customers using many many data points.. originally via google but now also via the meta social media platforms (FB and instagram). When their target profile searches 'car finance, house renovation finance, consumer finance' etc HMY will bid more than its competitors to be the top search result. And when the dodgy profiles search for finance HMY dont bid.. amazing stuff. All their competitors have a shotgun marketing approach hitting all profiles that search finance..

Better Margins: If i was to have a guess a broker is going to typically want 1.00% - 2.00% cut of the rate (i.e. funder provides 10% rate to broker who sells it to the customer at 11-12%) for placing a deal with a funder for consumer finance, not mortgage finance.. So straight away HMY has this great advantage where they do not need to pay this. They can either enjoy higher margins (which they do as they reported being cashflow positive on a much smaller book than their competitors), or they can secure more A+ customers by offering a 1-2% lower rate to win the deal.

Better Customer Retention If a broker places a customer with a funder who controls the customer? I say the broker. I say the next time that customer needs additional consumer finance they go to their broker and the broker places the finance where ever the next best deal is (or next best margin for them). This is where HMYs 3 Rs business comes in. They control the customer and can remarket to the customer at no cost. Easy for the customer to stay with HMY rather than go through the process of setting up a new account elsewhere.

In a nutshell I believe HMY is better at finding and retaining A+ customers. As each quarter goes by the model is proven even more than the last. Aussie is remarkable. Next quarter we could see book growth of $70m based on current run rate. That will mean it has grown from $135m at the start of the financial year to $309m at the end. The total book will be around $700m. Their original guidance earlier in the financial year was to grow the book by $100m and end at $600m. Wow they are going to smash that. Obviously even management didnt expect Aussie to be such the success story it is.

The fintechs are the future and the big banks are slow to react and change their models. Everything is going online and being automated. HMY are in the right space and executing. Shareholders will be rewarded in time.

**Dlownz** · 30-04-2022, 12:04 PM

Originally Posted by Rawz

Hey Jimdog i largely agree with your thesis. Especially potential takeover target, lets hope it doesn't get to that though.. this should be a very good long term compounder.

I have invested in HMY because i believe they have the best model out of all the new fintechs on the block. All of HMYs competitors like plenti, moneyme, wisr etc use brokers (as well as going direct to market). HMY have chosen a direct to consumer model. This model is scalable globally. They have built (and continue to refine) Stellare which is the technology that profiles potential customers using many many data points.. originally via google but now also via the meta social media platforms (FB and instagram). When their target profile searches 'car finance, house renovation finance, consumer finance' etc HMY will bid more than its competitors to be the top search result. And when the dodgy profiles search for finance HMY dont bid.. amazing stuff. All their competitors have a shotgun marketing approach hitting all profiles that search finance..

Better Margins: If i was to have a guess a broker is going to typically want 1.00% - 2.00% cut of the rate (i.e. funder provides 10% rate to broker who sells it to the customer at 11-12%) for placing a deal with a funder for consumer finance, not mortgage finance.. So straight away HMY has this great advantage where they do not need to pay this. They can either enjoy higher margins (which they do as they reported being cashflow positive on a much smaller book than their competitors), or they can secure more A+ customers by offering a 1-2% lower rate to win the deal.

Better Customer Retention If a broker places a customer with a funder who controls the customer? I say the broker. I say the next time that customer needs additional consumer finance they go to their broker and the broker places the finance where ever the next best deal is (or next best margin for them). This is where HMYs 3 Rs business comes in. They control the customer and can remarket to the customer at no cost. Easy for the customer to stay with HMY rather than go through the process of setting up a new account elsewhere.

In a nutshell I believe HMY is better at finding and retaining A+ customers. As each quarter goes by the model is proven even more than the last. Aussie is remarkable. Next quarter we could see book growth of $70m based on current run rate. That will mean it has grown from $135m at the start of the financial year to $309m at the end. The total book will be around $700m. Their original guidance earlier in the financial year was to grow the book by $100m and end at $600m. Wow they are going to smash that. Obviously even management didnt expect Aussie to be such the success story it is.

The fintechs are the future and the big banks are slow to react and change their models. Everything is going online and being automated. HMY are in the right space and executing. Shareholders will be rewarded in time.

Thanks guys I enjoy all this reading and the research and info is great. I really appreciate it. I'm a little overweight on this one now... Certainly brought into the dip recently I'm still down around 10% but comparing to how everything else is going its fairing reasonably well. Still hoped this would be above 1.70 by now but usual story nothing really moves till the instos get on board. Patience like with nzme and sky is needed.
My mistake this year was not selling the rest of my nzme when it hit 1.70 and watching it track down. Really thought with the share by back I was going to see it stay stable but oh well still a great hold. On another note I'd love it if beagle got on in this but as he's said he has HGH which has shares in this alreasy so HGH is a safer hold. 😁

**Rawz** · 30-04-2022, 12:29 PM

Yes Dlownz we need the instos and I guess they won’t be interested until they can read a report without all the proforma crap. End of this financial year can’t come soon enough- one more qrt to go!

Beagle won’t touch this in the current economic environment lol. He’s a very risk adverse accountant

Also- pretty sure 99% of HMY investors are underwater so nobody should be too hard on themselves for taking a position. End of the day the business is tracking nicely and that is the main thing