HGH - Heartland Group Holdings

[horus1]

I have a lot , buying more . well run do what they say. Good directors ,not ex politicians.

[winner69]

Even Roger said it's good. Shame we can't buy more on a Saturday. Next stop $1.60

Be patient nbt - next stop is $1.90 anyway (revised my outlook taking into account the recent exuberance)

[trader_jackson]

Be patient nbt - next stop is $1.90 anyway (revised my outlook taking into account the recent exuberance)

Almost tempted to sell out of my GNE or MRP holding to buy (more) HNZ now...

[pierre]

Almost tempted to sell out of my GNE or MRP holding to buy (more) HNZ now...

I did that a couple of weeks ago TJ. Sold GNE and topped up my HNZ and AIR. Both have moved in the right direction.

[kiora]

Yes - Heartland will be increasing its leverage

Some will say good, some will have reservations

Yes and the credit rating will drop and interest rate % it pays to attract funds will increase as a result.May be OK in good times but we all know they don't last forever.

[Beagle]

Even Roger said it's good. Shame we can't buy more on a Saturday. Next stop $1.60

The Tier 2 capital raise is a good idea...issuing capital notes at circa 6% and taking advantage of interest rates at multi decade lows and people who may not understand the risks they're taking, (Reserve Bank open bank resolution and other clauses that leave them exposed more than a conventional senior debt obligation)

Looking at the text of what HNZ had to say the other day I think people may be getting a little ahead of themselves thinking there could be $100m repaid to ordinary shareholders. Nothing in the text of the news release would suggest that, (in fact they suggest some of it could be used for the MTF purchase), and the issue hasn't even been successfully executed yet. If anything they might play this a little conservatively and pay out less than any amount that may be raised given the uncertain economic conditions even if they don't secure MTF, which itself is far from a done deal) which wouldn't be a bad way to play it IMO.

There was a big increase in consumer debt provisioning in the FY15 accounts at a time that the unemployment figures were relatively stable. With some economists anticipating a meaningful increase in unemployment next year on top of that recently announced to 6%, this could prove to be another challenge in the year ahead especially when a lot of this lending is being done on an unsecured basis through an unproven channel, (Harmoney).

When you compare the PE of HNZ to other Australasian banks which also have their own opportunities and challenges HNZ's shares at $1.30 appear quite fully priced to me with all of the apparent benefits of the Tier 2 issue already fully priced in notwithstanding it hasn't been squared away yet.

Disc: Not holding - One swallow doesn't make a summer.

[Arbroath]

Roger

I agree at 11-12 times earnings HNZ are priced similarly to the big Aussie banks but there is one crucial advantage for NZ taxpayers in owning Heartland over the Aussie banks and that is the tax effectiveness. At $1.30 an 8cps dividend for 2016 is a gross yield of 8.5%. NAB is on a similar multiple and payout ratio and its A$1.98 dividend on the A$28.65 share price is a gross yield of 6.9%. Heartland effectively pays an extra 1.5-2% per annum gross return more than all four Aussie lenders. Now the big Aussies are AA- and Heartland is BBB+ so some premium is justified so maybe the extra income is already priced into Heartland given it trades on a similar multiple.

Disc: I hold HNZ

[Beagle]

Yes Arbroath the inability of Kiwi's to claim Australian franking credits is quite an inequitable situation in the light of so called closer economic relations with Australia and in my opinion is a major unresolved sore point with Kiwi investors so if you are looking at HNZ purely in the context of its ability to pay Kiwi's a higher yield by virtue of its imputation credits then yes the advantage at this stage in that respect is clear. On the other hand you have Australian banks with a vastly longer track record than HNZ and a significantly superior credit rating.

For much of 2014 HNZ traded at a meaningful PE discount to the major Australian banks.

[kizame]

And of course one point you forget when valuing hnz compared to the aussie banks is the growth potential of the former.
HNZ being a small bank with a big desire to grow,has way more potential now to return substantial capital gains and dividend growth,than the big cumbersome mature aussies.
Therefore with their stated intentions to grow organically,and through aquisition,in my view justifies a higher pe,being a small growth company.

[Beagle]

I don't forget growth "potential". Potential is contingent on successful execution and the degree and extent to which HNZ are chasing unsecured consumer lending and funding it through paying the highest call account rate of the N.Z. banks at 3.6%, (support that is literally here today and gone tomorrow at the slightest hint of any drama), would worry this worry worm, if I was a shareholder in addition to other worries previously articulated.

Anyway it was well worth the exercise to look over 4 traders to see consensus growth expectations for the next three years earnings for the bank's I follow and they're broadly supportive of your argument with the exception of Bank of Queensland currently trading on a PE of 13 with consensus growth expectations of 34% in total for the next three years, approx. 10% growth compounding. 83 cps in Fy15, to 101, 105 and 111 forecast in Fy18.

This is a bank formed in 1874 so has a track record longer than your great grandparents arms and their parents before them.

Consensus growth expectations for HNZ are for earnings to grow from 10 cps in 2015 to 11, 12.1 and 12.7 in 2018, total growth of 27% or approx. 8.2% compound per annum.

HNZ currently trades at 11.8 times consensus FY16 earnings and BOQ at 13 times. This is the best proxy comparison as the major banks as you say have lower projected growth rates.

On the basis of the superior growth rate of BOQ that has to be worth an extra PE of at least 1.8 (the greater compound growth rate per annum), in fact the legendary Ben Grahame would argue growth should be valued at 2 x so you could easily make the case their superior consensus growth rate is worth more than an extra PE of 2.

Then there's BOQ's vastly longer track record and better credit rating and how you value that...you decide.

Anyway for those that believe consumer and dairy debt won't be an untoward sized problem I would agree HNZ are the better hold as a dividend yield play for the reason of being able to claim the imputation credits but they look fully priced to me, but for those looking for capital growth it looks to me the BOQ are the better play. No way do the rampers have any comparative valuations to support their lofty SP aspirations IMO. That said we live in an ultra low interest rate environment where most banks are paying 2.0 - 2.5 % on call and only another ~ 1% to lock your money away on term deposit so yield hunters could easily drive this and a number of other high dividend yielding shares on the NZX beyond fair value. A prime example of this is HLG which despite having clearly articulated currency and competition headwinds saw its SP rise.