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  1. #11501
    Speedy Az winner69's Avatar
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    Quote Originally Posted by Beagle View Post
    LOL thanks Peat, such a memorable pendant...looks like something KW would wear Yes mate as you suggest things do overshoot in both directions but I suspect if it does get down to $1.40 there will be plenty of other things to worry about as well so that's not something I want to see.
    A thing of beauty though that chart ...from an artistic point of view that is.

    Peat should have used a log scale though or even used the log of the price data. Snowy will not be pleased.
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  2. #11502
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    Quote Originally Posted by Beagle View Post
    LOL thanks Peat, such a memorable pendant...looks like something KW would wear Yes mate as you suggest things do overshoot in both directions but I suspect if it does get down to $1.40 there will be plenty of other things to worry about as well so that's not something I want to see.
    Only start to worry when directors and management start to sell.
    In the meantime I have been spending a bit of my lovely HBL divie.Brought both daughters a new oven.Should be plenty of decent tucka treats coming my way this Christmas.Will have Heartland to thank..
    Last edited by percy; 12-10-2018 at 06:43 PM.

  3. #11503
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    Quote Originally Posted by winner69 View Post
    A thing of beauty though that chart ...from an artistic point of view that is.

    Peat should have used a log scale though or even used the log of the price data. Snowy will not be pleased.
    If Snowy had a chart that illustrated his high horse and rude comments, it'd be alot easier than deciphering the cryptic atonements you're supposed to make.

    Poor Beagle reckons 10-15% is a serious ("full blown") correction. Been a tough week for some shares, but also a long time since the pooh really hit the fan, which it hasn't, we all tend to forget the pain, especially after 10 years of sustained upside.

    I reckon today is a decent illustration of what the market thinks, any sign of the bull, they get a sniff of the futures and behold, it's all good despite another few hundred points down on the open market and pile into their darlings like there's no tomorrow.

    Still, there's a few who don't give a toss about capital value. As long as they're growing EPS it's all good.

  4. #11504
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    Default BC4/ Equity Ratio FY2018

    Quote Originally Posted by Snoopy View Post
    Updating this number for the full year FY2017. 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 AR2017

    = $569.595m/ $4034.671m = 14.1%

    The customer loan base year on year has once again increased a little faster than the company equity (+14.4%). This means the balance sheet is being worked a little harder. This isn't a problem if the risk of loans becoming distressed is going down.

    The significant increase in share capital over the year was therefore from (reference "Statement of Changes in Equity")

    1/ Retained Earnings: $62.240m - $41.977m = $20.263m
    2/ Dividend Reinvestment Plan: $10.590m
    3/ Share Based Payments to staff: $1.053m
    4/ Issue of Share Capital: $40.003m - $0.655m = $39.348m
    Total $71.254m

    This is a big increase on the 'new capital generated within the existing Heartland in FY2016' ($22.996m), with most of that increase accounted for in the capital raising undertaken over the year.

    The historical picture of this ratio is tabulated below.


    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Target
    Equity Ratio 16.0% 14.6% 15.0% 14.3% 14.1% 14.1% -

    With all the recent market upheavals, shareholders might like to know just how conservatively geared HBL is in an historical context.

    Updating this number for the full year FY2018. 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 AR2018

    = $664.160m/ $4,495.926m = 14.8%

    The customer loan base (finance receivables) growth year on year (+12.4%) has in relative terms reversed and is now growing more slowly that the company equity (+16.6%). This means the balance sheet has been made 'less stressed' over the year.

    The significant increase in share capital over the year was therefore from (reference "Statement of Changes in Equity")

    1/ Retained Earnings: $71.221m - $47.895m = $23.326m
    2/ Dividend Reinvestment Plan: $12.745m
    3/ Share Based Payments to staff: $0.666m
    4/ Issue of Share Capital: $59.225m - $0.910m = $58.315m
    Total $95.052m

    This is a significant increase on the 'new capital generated' within the existing Heartland over FY2017 ($71.254m), with most of that increase accounted for in an even bigger capital raising undertaken over FY2018.

    The historical picture of this ratio is tabulated below.


    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Target
    Equity Ratio 16.0% 14.6% 15.0% 14.3% 14.1% 14.1% 14.8% -

    So Heartland is more conservatively geared than at any time in the last four years.

    SNOOPY
    Last edited by Snoopy; 16-10-2018 at 11:09 AM.
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  5. #11505
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    Quote Originally Posted by Snoopy View Post
    With all the recent market upheavals, shareholders might like to know just how conservatively geared HBL is in an historical context.

    Updating this number for the full year FY2017. 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 AR2018

    = $664.160m/ $4,495.926m = 14.8%

    The customer loan base (finance receivables) growth year on year (+12.4%) has in relative terms reversed and is now growing more slowly that the company equity (+16.6%). This means the balance sheet has been made 'less stressed' over the year.

    The significant increase in share capital over the year was therefore from (reference "Statement of Changes in Equity")

    1/ Retained Earnings: $71.221m - $47.895m = $23.326m
    2/ Dividend Reinvestment Plan: $12.745m
    3/ Share Based Payments to staff: $0.666m
    4/ Issue of Share Capital: $59.225m - $0.910m = $58.315m
    Total $95.052m

    This is a significant increase on the 'new capital generated' within the existing Heartland over FY2017 ($71.254m), with most of that increase accounted for in an even bigger capital raising undertaken over FY2018.

    The historical picture of this ratio is tabulated below.


    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Target
    Equity Ratio 16.0% 14.6% 15.0% 14.3% 14.1% 14.1% 14.8% -

    So Heartland is more conservatively geared than at any time in the last four years.

    SNOOPY

    Thanks Snoopy, always appreciate your posts

  6. #11506
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    Default BC3/ Underlying Gearing Ratio FY2018

    Quote Originally Posted by Snoopy View Post
    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 (FY2017) statement of financial position the debt excluding borrowings is:

    $25.479m + $9.856m = $35.335m (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:

    $4.034.671m - ($3,545.897m +$4.909m + $318.698m) = $165.167m (2)

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

    $165.167m - $71.237m = $93.930m

    ----


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

    $35.335m/$93.930m= 37.6% < 90%

    Result: PASS TEST

    The historical picture of this ratio is tabulated below.

    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Target
    Underlying Gearing Ratio 20.2% 14.7% 40.5% 58.4% 37.4% 37.6% < 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 (FY2018) statement of financial position the debt excluding borrowings is:

    $24.249m + $11.459m = $35.708m (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:

    $4,495.926m - ($3,984.941m +$9.196m + $340.546m) = $160.943m

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

    $160.943m - $74.401m = $90.542m (2)

    ----


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

    $35.708m/$90.542m= 39.4% < 90%

    Result: PASS TEST

    The historical picture of this ratio is tabulated below.

    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Target
    Underlying Gearing Ratio 20.2% 14.7% 40.5% 58.4% 37.4% 37.6% 39.4% < 90%

    SNOOPY
    Last edited by Snoopy; 16-10-2018 at 11:08 AM.
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  7. #11507
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    Quote Originally Posted by Snoopy View Post
    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.

    <snip>
    Target
    Underlying Gearing Ratio < 90%
    I wish to expand upon the idea of watching the 'Underlying Gearing Ratio' and try to figure out where that "< 90%" standard came from. I didn't create any of this. But I figure it is best to try and understand what this means rather that blindly following numbers.

    Suppose I had a fully paid up house in Auckland worth $1m. Suppose I wanted to utilise this asset to start a finance business.

    Step 1: Sell the house and bank the cash.
    Step 2: Move into a rented one room bedsit on the North Shore, and prepare my plans for the 'Snoopy Finance Limited' conquest!

    My net tangible assets (total underlying company assets) now consist of $1m in cash (yay).

    This means the debt I can take on from 'parent bank' adds up to $899,999.99.

    That is because: $899,999.99/$1,000,000 < 90% (the BC3 covenant standard)

    Effectively I now have $1.9m in 'seed capital' to play with.

    If I go with an 'equity ratio' of 15% for the whole of 'Snoopy Finance Limited' then I can support a loan book of total size of:

    $1m/0.15 = $6.666m

    That means the bank would be very happy for me to borrow $5.666m from 'you lot' as debenture money. I quick 'wag of the tail' and all you guys would be falling over yourselves to lend me the money. Deal done!

    A multi-million dollar loan book sounds good. I think I am on my way to becoming really rich. But I only have a $1m 'buffer' before all my cash is wiped out in the event of a downturn. If GFC mk2 reduces everything that I have loaned in value by

    $1m/ $6.666m = 15%

    then all my share capital is wiped out. Of course I could borrow a bit from 'parent bank' (circa $900,000) to try and re-engineer my financial position to something acceptable by balance date. But if half my capital is wiped out (underlying loans I have financed drop in value by 7.5%) that will consummately reduce what I can borrow from 'parent bank' to $450,000. And it also means that I will have to reduce my loan book size to $3.333m in quick time, while paying half of that debenture money back early.

    This is starting to sound potentially 'very messy'. An 'underlying gearing ratio' of 90% could see 'Snoopy Finance Limited' wiped out in even a mild market downturn. The secret to survival would be to keep a careful track of some of those other banking covenants. Namely:

    BC3/ EBIT to Interest Expense ratio: This will ensure a decent profit margin on the 'Snoopy Finance ' lending.
    BC5/ Customer Concentration Test: This will ensure not too many loans are correlated together with respect to risk.
    BC6/ Liquidity Buffer ratio aka 'Meads Test': This will ensure there is a good turnover of loans so that debenture holders can be repaid early if market circumstances demand it.

    I am really surprised that most parent banks would be happy to write 'Snoopy Finance Limited ' a $900,000 loan facility from day 1. The one way I could see as justification for that is if there were enough other controls on those loans to reduce the chances of 'Snoopy Finance Limited' going off the rails. The main risk I see here is banks lending too much money to me, not too little. The underlying gearing ratio of <90% is to safeguard the parent bank's interests, not mine. Parent banks have little concern for the shareholders of the companies they loan to. As long as the parent bank can get its money back in a downturn, the shareholders of 'Snoopy Finance Limited' can get stuffed. Could this be the reason that second tier finance companies (like Heartland) tend to meet this covenant standard quite easily, because they care very much about looking after their own shareholders?

    Despite all this, there is one tiny flaw in this 'Snoopy Finance Limited' business plan though. I don't own a $1m freehold house in Auckland :-(.

    SNOOPY
    Last edited by Snoopy; 01-10-2019 at 08:36 PM.
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  8. #11508
    ShareTrader Legend Beagle's Avatar
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    There's the rates, repairs and maintenance and cleaning of one's oversized Mcmansion, all of which are not much fun and house prices have stopped going up in Auckland...feel a bit better now Snoopy ?
    Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.
    Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine

  9. #11509
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    Default BC2/ EBIT to Interest Expense ratio FY2018

    Quote Originally Posted by Snoopy View Post
    Updating for the full year result FY2017:

    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) = $278.279m - $71.684m= $206.595m

    Interest expense is listed as $115.169m.

    So (EBIT)/(Interest Expense)= ($206.595m)/($115.169m)= 1.79 > 1.20

    Result: PASS TEST

    The historical picture of this ratio is tabulated below. Despite the shakey start, the trend remains very pleasing.

    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Target
    EBIT/ Interest Expense 1.15 1.22 1.44 1.52 1.65 1.79 >1.2
    This is an assessment method of looking at the underlying earning power of Heartland, compared to the interest bill they face while making their earnings. Updating for the full year result FY2018:

    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) = $309.284m - $80.433m= $228.851m

    Interest expense is listed as $125.483m.

    So (EBIT)/(Interest Expense)= ($228.851m)/($125.483m)= 1.82 > 1.20

    Result: PASS TEST

    The historical picture of this ratio is tabulated below. It looks to be getting better and better.
    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Target
    EBIT/ Interest Expense 1.15 1.22 1.44 1.52 1.65 1.79 1.82 >1.2

    SNOOPY
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  10. #11510
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    Quote Originally Posted by Snoopy View Post
    (EBIT)/(Interest Expense) > 1.20
    To assess underlying earning power, I can see a few potential problems with this statistic.

    1/ EBIT leaves out tax. Yet apart from a strategy of reducing your income, it is almost impossible to avoid paying more income tax. My preference is to use a standardised tax rate rather than leave it out. I feel this is a better measure of operating performance between reporting periods while keeping earnings figures more realistic.

    2/ 'Interest Expense' leaves out all the other expenses. What about the employee wage bill, cost of holding inventory to sell, and the cost of maintaining a retail footprint? These are real expenses that are needed when conducting business every day. So why leave them out of any comparative statistic? I guess one reason is, as an upstream lender to a said company, 'interest expense' is the one expense you can control. But isn't reducing 'other expenses' an equally valid way of sorting out your business profitability as reducing interest rates paid?

    3/ The 'I' in EBIT represents interest payable in the running of the business. I have never seen a business that borrows money and doesn't pay any interest on that money. So I have difficulty with the logic of assessing income while leaving out the associated interest bill. Divide one dollar amount by another and you will get a dimensionless ratio. Dimensionless ratios are often good for comparative purposes. The 'Interest Expense' we are dividing by in this statistic is exactly the same 'I' that appears in EBIT. Except that the algebra doesn't quite work this way. EBIT means earnings before interest and tax. So the interest bill isn't there to divide and normalise out of the equation when the arithmetic division is done. I think NPAT/I would be a better measure which would genuinely remove operational sensitivity to interest rates.

    A not fully gruntled,

    SNOOPY

    .....who will nevertheless continue to look at EBIT/I, because this is what the parent banks do.
    Last edited by Snoopy; 18-10-2018 at 11:36 AM.
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