HMY - Harmoney Corp Limited

[Rawz]

NZ SP catching up (down?) to the Aus price.

I bought some more HMY on Aus side. $0.72. Already down lol. Feels normal

[Snoopy]

New low.

What's happening?

Serious question.

One thing I have learned about investing in financial entities is that it is always more complicated than you think it is. Thankfully I have a top bloke called Jeff managing my Harmoney holding via his 'Heartland' investment fund, that I own shares in. I am very happy to let Jeff do the job for me on this one. But I did take a peek under the Harmoney hood myself, via reading the HY2022 presentation. Slide 34 is very telling.

There is a real half year NPAT profit there of $1.170m, which is good to see. But keep moving down the line and you will see $2.730m in a credit loss provision. So net profit does not cover the credit loss provision, and that puts the company into an underlying cashflow negative position. Yes, I know some of that 'cashflow crisis' is undone because some of the share based remuneration payments are not cash items. But if the company is not being recognised as doing well by the market in the future, then I imagine employees will be taking cash rather than shares in the future, or maybe not earning any share based remuneration (because these share based payments may be bonus payments, contingent on an advancing share price).

The company adds back Depreciation and Amortisation when calculating their 'cash profit'. But if the software needs tweaking and the hardware needs upgrading, this strikes me as a disingenuous adjustment from an operational cashflow business cycle perspective. The Harmoney loan approval software has not been tested in a real recession. So there must be a question mark over the provisioning levels, which in turn casts a question mark as to whether Harmoney makes any money at all on a business cycle after tax basis.

Yes I get the argument that the business is scaling up and you wouldn't expect a growth company like this to be profitable from the get go. But heading into a potential recession in both NZ and Australia, with the longer established market indicating NZ loan book already no longer growing, I can see why the market might be discounting the 'growth dream'. Doesn't Heartland itself operate on line loan approval itself via algorithms rather than people? Obviously these Heartland algorithms are not as good as the Harmoney ones, other why invest in Harmoney? So maybe Heartland are playing a smart game here.

Outcome 1/ Harmoney recovers from its market mire, profits soar to the stratosphere and Heartland has a first mover stake in the next financial big thing.
Outcome 2/ Harmoney software is found wanting in a recessionary market and the company is put into liquidation. Heartland then buys all the software for next to nix from the receiver, to technically boost its own on line loan approval offering.

Either way, Heartland ends up winning. But Harmoney shareholders will only be winners under Outcome 1.

Smart man that Jeff, from my 'Heartland' investment fund!

SNOOPY

[Rawz]

Good post Snoopy.

Market needs the full year results. They are maybe 3 weeks away?
Then the market really really needs the annual report.

[Muse]

One thing I have learned about investing in financial entities is that it is always more complicated than you think it is. Thankfully I have a top bloke called Jeff managing my Harmoney holding via his 'Heartland' investment fund, that I own shares in. I am very happy to let Jeff do the job for me on this one. But I did take a peek under the Harmoney hood myself, via reading the HY2022 presentation. Slide 34 is very telling.

There is a real half year NPAT profit there of $1.170m, which is good to see. But keep moving down the line and you will see $2.730m in a credit loss provision. So net profit does not cover the credit loss provision, and that puts the company into an underlying cashflow negative position. Yes, I know some of that 'cashflow crisis' is undone because some of the share based remuneration payments are not cash items. But if the company is not being recognised as doing well by the market in the future, then I imagine employees will be taking cash rather than shares in the future, or maybe not earning any share based remuneration (because these share based payments may be bonus payments, contingent on an advancing share price).

The company adds back Depreciation and Amortisation when calculating their 'cash profit'. But if the software needs tweaking and the hardware needs upgrading, this strikes me as a disingenuous adjustment from an operational cashflow business cycle perspective. The Harmoney loan approval software has not been tested in a real recession. So there must be a question mark over the provisioning levels, which in turn casts a question mark as to whether Harmoney makes any money at all on a business cycle after tax basis.

Yes I get the argument that the business is scaling up and you wouldn't expect a growth company like this to be profitable from the get go. But heading into a potential recession in both NZ and Australia, with the longer established market indicating NZ loan book already no longer growing, I can see why the market might be discounting the 'growth dream'. Doesn't Heartland itself operate on line loan approval itself via algorithms rather than people? Obviously these Heartland algorithms are not as good as the Harmoney ones, other why invest in Harmoney? So maybe Heartland are playing a smart game here.

Outcome 1/ Harmoney recovers from its market mire, profits soar to the stratosphere and Heartland has a first mover stake in the next financial big thing.
Outcome 2/ Harmoney software is found wanting in a recessionary market and the company is put into liquidation. Heartland then buys all the software for next to nix from the receiver, to technically boost its own on line loan approval offering.

Either way, Heartland ends up winning. But Harmoney shareholders will only be winners under Outcome 1.

Smart man that Jeff, from my 'Heartland' investment fund!

SNOOPY

Companies produce statutory NPAT and often provide underlying adjustments, and investors should always carefully examine if there is any need to deviate from npat, and the validness of any adjustments.


Re HMY for instance, in my own spreadsheets for my own investment decisions, I absolutely do not add back depreciation or share based employee remuneration. They are both real expenses and I think its ridiculous to adjust for them, It's been my experience that early stage companies tend to add back as much as they can, and also rationalise it by saying its what their industry peers do (who also do it for reason 1, and perpetuates a self reinforcing cycle amongst the industry). But they are just amendments to the stats, and can be accepted or rejected freely.

Within HMY accounts there are the credit losses actually incurred during the financial period, and then a provision for all future credit losses expected from the book as at the closing date (ie those credit losses can be over 3 years). If the book grows incredibly fast, the movement in provision (IE the expense) is massive, even if the % of receivables falls. The provision expense from growing your book fast can be a double digit factor vs growing a book at GDP (some banks dont bother to break out the movement in provision expense in P&L and just lump it with ICL, though you can work it out by examining the balance sheet). So I do tend to add back the after tax impact from movement in provision, whether positive or negative. I care more about the credit losses incurred during the period. And when looking at the company on this basis I am mindful of how much were those incurred credit losses, vs what do I think is a maintainable level through the cycle, or how would it look if in the middle of a recession.

Re the point on cashflows, movement in provision for future expected credit losses is a non cash expense so its movement doesn't actually impact cashflows. And for that matter, incurred credit losses are actually non cash as well (but are a very real expense).

[winner69]

Does much in the way of ongoing development costs gets capitalised .... like straight to the balance sheet as an intangible

[Muse]

Does much in the way of ongoing development costs gets capitalised .... like straight to the balance sheet as an intangible

yup. and in excess of the depreciation & amortisation charge of intangibles. hence, do not add back D&A.

I've been involved in other investments though where ongoing capex was a fraction of depreciation. So I kinda thought of that particular company's EV/EBIT as a multiple of EV to ebitda less capex.

[Snow Leopard]

....There is a real half year NPAT profit there of $1.170m, which is good to see. But keep moving down the line and you will see $2.730m in a credit loss provision. So net profit does not cover the credit loss provision, and that puts the company into an underlying cashflow negative position. Yes, I know some of that 'cashflow crisis' is undone because some of the share based remuneration payments are not cash items. But....

Is it important that those numbers are from the pro-forma stuff and the 'real' profit was a loss of $5M ?

Asking for a friend.

[Muse]

Is it important that those numbers are from the pro-forma stuff and the 'real' profit was a loss of $5M ?

Asking for a friend.

yup. but the stats should look a lot more like the proformas after the p2p is wound down.
they should have never IPO'd when they did. too early.

[jimdog31]

yup. but the stats should look a lot more like the proformas after the p2p is wound down.
they should have never IPO'd when they did. too early.

I hear you, but wouldnt that have made it harder for them to get the level of warehousing facilities they have since? the extra compliance that a public company has would surely help them when it comes to accessing these facilities.

[Muse]

I hear you, but wouldnt that have made it harder for them to get the level of warehousing facilities they have since? the extra compliance that a public company has would surely help them when it comes to accessing these facilities.

yeah probably.
They needed to raise as they were early stage, and to lend out. A private round would have been too small. Being listed gives more cred to a young lender trying to attract wholesale lending, let alone the ABS market. And I think it was percy who told me that the reason HGH and HMY are dual listed because it makes it easier to get wholesale funds that can only be leant to or thru aussie companies or listed companies

so i'm probably wrong. i'll just rephrase - their IPO pricing was madness.