HGH - Heartland Group Holdings

[Snoopy]

Great detailed work Snoopy.

One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.

I have created Scenario 1b, Scenario 2b and Scenario 3 (which doesn't get a 'b' as I haven't had to modify it yet). These are meant to represent a pessimistic, realistic and optimistic view of how Heartland's profits might go up to FY2022. In Scenarios 1b and 2b, I am projecting profits to be below FY2019 and FY2020 levels. In this situation I wouldn't expect many (or any?) performance rights or share options to be exercised. However, in Scenario 3, with profits up sharply in FY2022 there is a very good chance that performance rights would be exercised. Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.

This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise anywhere as fast as the profits.

Yes very good points. I am guessing that the HGH dividend will be suspended for the rest of this calendar year at least.

No dividend => no DRP operating => No increase in shares

However if the REL loan book really does expand to $1,990.1m by EOFY2022, then Heartland may indeed need to raise more capital to support this loan book growth. So your point is very valid 'forest'. In that 'optimistic' scenario, my estimated eps figure may indeed end up being significantly too high.

My inkling though, and given that all of these are Scenarios are guesses, albeit hopefully intelligently framed guesses, is that other errors will be more significant than the number of shares on issue. The rate of expansion of the REL loan book is something I could be more than a little wrong about. Likewise I find it difficult to guess by how much business lending will really decline. That being the case, I am not going to get too hung up on the number of shares on issue. You were certainly right to bring this matter to everyone's attention though 'forest'!

SNOOPY

[forest]

Originally posted Snoopy.
Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.


You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

[winner69]

Originally posted Snoopy.
Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source.


You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

That's what happens when you have capital raises where most of it goes to pay juicy divies

[Beagle]

Great detailed work Snoopy.

One question I have, how confident are you that the present amount of shares on issue stays steady at app 581m?
If I have my numbers right than HGH has app 1.7m share options and app 3.2m performance right on issue at the end of 2019 financial year.
This company has a bad habit of diluting shareholders through dividend reinvestment plans, share options, performance rights and capital raisings.
With all these regular dilutions in shareholdings the earnings per share do not rise
anywhere as fast as the profits.

That's an absolute disgrace. Jeff is already paid a grossly excessive amount of money in my opinion.

I missed the rebound in this one and I am okay with that. Plenty of trouble coming down the track for HGH with their hundreds of millions of finance company type loans, much of it unsecured.

[forest]

That's what happens when you have capital raises where most of it goes to pay juicy divies

That is right.
Continuing this trend seems value destructing to smaller shareholders.
The extra shares on issue require larger capital raisings for the extra dividends. Which follows ever larger discounted placements for institutions to pay this dividend.
It has become a visual circle.

[Snoopy]

Originally posted Snoopy.
"Yet if all the new shares you have outlined are converted, that would only be 4.9m out of 581m. That is less than 1% of the shares on issue. So I am not too worried about a potential error in the 'eps' calculation from this source."

You right that is only less than 1% and if you put it that way my point looks pedantic.
The unknown however is the future amount of options, performance rights, dividend reinvestment shares, placements etc in the pipe line to dilute present share holdings.
All we know is that dilution of shares seem to be the norm for HGH.

So let's look back over a 5 year period to see the effect of the share dilution over that period.
For the year 2014 there were app 412m weighted average shares on issue.
For the year 2019 there were app 563m weighted average shares on issue.

So over a 5 year period an extra app 151m dilution of shares. That is an extra 36% of shares. Now this to me looks material and makes me wary of investing.

We know that for the 2020 year the weighted average shares on issue will have increased
again. Shares on issue are already app 581m.

A couple of points here.

1/ You talk about a five year period and shares increasing by 36%. But I am only forecasting two years and one month out. So is a 36% dilution in shares a realistic expectation over that time period?

2/ The 581m shares on issue -now- includes those shares issued as part of the DRP in March 2020. So I doubt that the number of shares will increase by financial year end, or indeed calendar year end (given that the Reserve Bank has dictated all dividend payments by banks in NZ must be stopped until further notice).

Furthermore you should bear in mind that if there is a cash issue (and I have made the argument in previous posts that this is by no means a given), then existing shareholders are likely to be able to purchase new HGH shares at a discount to the market price via a share purchase plan. So issuing a whole lot of new shares is not 100% bad for existing shareholders.

Now. lets forgo all the arguments I have made above, and assume your worries are realised and 18% more Heartland shares (say) are issued over FY2022. I would argue that this is most likely to occur under my Scenario 3 where Heartland is really growing again. Growth requires a larger capital base. Just standing still means that existing capital levels are likely to be adequate. So in this instance you would take my FY2022 earnings per share forecast and divide it by a factor to reflect the larger number of shares on issue:

20.1cps /1.18 = 17.0cps

i am not going to disagree with you that if you believe that the shares will be diluted to this extent, then when assessing 'eps' this is what you should do. But we don't know this dilution will occur. So my preference is to keep my modelling figures as they are but be aware that despite coming up with 'definite numbers' my modelling will contain errors (such as not accounting for capital dilution). I think it is important to remember that all business forecasting should be treated with a degree of scepticisim, no matter how carefully detailed and complicated it appears to be.

SNOOPY

[oldtech]

Meanwhile, SP continues to head in the right direction ... $1.33 currently

[forest]

Like you Snoopy I have no idea about the extent of share dilution in time to come. All I like to point out that dilution of shares seem to be the norm at HGH and that it is detrimental to shareholders unless they can participate in share placements. The Share purchase plans are often unfair and combersome.

[Snoopy]

One wonders into what new area's UDC will branch out and grow into the future ?

On the other hand 1.2 times HGH's NTA = $1.26. As I suggested on the weekend (and now supported by this transaction), the shares seem to be about fair value at present BUT who knows the extent of losses from Covid 19 in HGH's books in the next 2-3 years ? I think anyone who tells you they do is in fantasy land lol

No one knows exactly how this Covid-19 tail may whip around and strike down HGH profits in the future. But I would argue you don't have to know this to build an investment case. I would argue the solution to investing in these circumstances is to do a 'Scenario Analysis'. That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: Scenario 1b, Scenario 2b and Scenario 3. I assess that the likelihood of each of these scenarios occurring in order is 30%, 50% and 20% (observant readers will notice these three relative probabilities add up to 100%).

So what happens when I combine my forecast from each scenario in those proportions?

FY2021	eps	Probability	Factored Earnings Contribution
Scenario 1b	8.6c	30%	2.58c
Scenario 2b	10.4c	50%	5.20c
Scenario 3	14.8c	20%	2.96c
Total		100%	10.7c

FY2022	eps	Probability	Factored Earnings Contribution
Scenario 1b	7.7c	30%	2.31c
Scenario 2b	11.3c	50%	5.65c
Scenario 3	20.1c	20%	4.02c
Total		100%	12.0c

Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.

FY2021: $1.07 to $1.28
FY2022: $1.20 to $1.44

With the share trading at $1.33 today, I would argue the share price has got ahead of itself and is now in the mid price range of FY2022 earnings projections. There are too many uncertainties about to justify buying in at this price now. I would like to increase my own stake in HGH further. But I am going to wait for a pull back in the share price before I do so.

SNOOPY

discl: hold HGH with an average holding price of $1.40 (excluding dividends). Of course most of that holding was accumulated pre Covid with different earnings expectations!

[winner69]

Meanwhile, SP continues to head in the right direction ... $1.33 currently

That’s pretty good eh

Could be $1.50 next week


I think some lose sight of the numbers and as such lose sight of any chance of being objective.