HGH - Heartland Group Holdings

[winner69]

A cash issue at some stage this year would not surprise me in the slightest. I doubt they will pay a final dividend for the FY20 year so there's more capital from retained earnings as well.

OMG ...I better start saving if I need cash for both Heartland and Oceania cap raises.

Hate cap raises when they’re needed to shore up the balance sheet ....even more so when both have been so generous with dividends.

It’s like getting a dividend knowing you’ll probably have to give it back later.

[Snoopy]

HGH Lendings vs HGH Borrowings

Customers owe HGH 'Finance Receivables' of $4,348.050m There is no breakdown in AR2019 (note 15) as to what loans are current or longer terms. However, if we look at note 23 'Liquidity Risk', we can derive the expected maturity profile of total finance receivables due over the next twelve months.

	On Demand	0-6 Months	6-12 Months	Total
Expected Receivables Due	$80.584m	+ $1,020.160m	+$646.123m	= $1,746.867m
less Expected Deposits for Repayment	$26.946m	+ $435.882m	+ $225.984m	= $688.812m
equals Net Expected Cash Into Business	$53.638m	$584.278m	$420.139m	$1,058.055m	{B}

If more money is expected to be coming in from customer loans being repaid, than is expected to be having to be repaid to the debenture holders, then this is a good thing for debenture holder liquidity. That is the case here.

Summing up:

(Total Current Money to Draw On {A})/(Expected Net Current Loans Outstanding {B})
= $170m / $1,058.055m
= 16.1% > 10%

=> Pass Short term liquidity test

Of course there are other ways to satisfy liquidity requirements. Issuing new shares or corporate bonds are two, and Heartland has done both in the past. But sometimes these are not options when market conditions change. This is why it is important to retain some 'headroom' with your existing borrowing arrangements. It appears that from the annual report, that Heartland now has enough borrowing headroom in reserve. That should give HGH shareholders confidence as we move into an era of lesser business confidence in general.

Loan-Deposit Maturity			Loan-Deposit difference in Heartland Australia FY2019 Financial Receivables - Liabilities: Summation
On Demand			$38.358m
0-6 months			($2.395m)
6-12 months			$18.106m

On the liquidity thing, if you think they have a liquidity problem then I suggest you check their website for their current deposit and at call rates which have all been reduced in line with other banks. My opinion looking at current term deposit rates is they are no longer a way to get a return after tax that will keep you ahead of inflation. This has implications for shares paying reliable dividends that achieve that objective.

I think the numerical data I have presented on liquidity as it relates to the current six months (from 1st January 2020 to 30th June 2020) is clear. It says there is no liquidity problem. I have put the figures of most interest in bold in the quotes from my previous posts. The first quote represents the whole of Heartland Group Holdings. The figure of positive $420.139m represents the excess of cash available over and above that needed to pay back maturing term deposits in the current time period.

The second reference figure relates to Heartland Australia only. The $18.106m represents the excess of Australian Reverse Mortgages being paid back over the wholesale bonds that were set up to fund these mortgages, but are now due for repayment. The word 'excess' means there is money to do this.

If there is plenty of money floating about to repay wholesale depositors when a loan is due, then there is little incentive for Heartland to keep deposit interest rates high right now , because they probably already have most of the working capital they want,

However, this result is not something that can be extrapolated into subsequent time periods.

SNOOPY

[Snoopy]

A cash issue at some stage this year would not surprise me in the slightest. I doubt they will pay a final dividend for the FY20 year so there's more capital from retained earnings as well.

Balance sheet losses from areas of the business that are likely to go bad look to be contained and manageable within the current capital structure. Slowing growth is going to obviate the need for more capital in the medium term IMO. We know now that extra capital will not be needed to fund the purchase of UDC. So I am of the opinion that a capital raising will not be required in the short to medium term. Having said that, and if I apply wider banking services logic to Heartland itself, the best time to ask a bank for a loan is when you don't really need one. You could apply the same logic to a potential capital raising by Heartland from shareholders! So while I don't expect a capital raising, I am prepared to help fund one if called upon to do so.

SNOOPY

[King1212]

Crap guys... capital raising....might sell mine one soon....

[winner69]

OMG just saw a chart that in the US bank stocks are strongly correlated to long term treasuries. Stocks rise as rates rise (& curve steepens) ...and vice versa

Just as well those things don’t happen in NZ ...or else we could be looking at a capital raise at 45 cents

[King1212]

UDC gone...to Japanese Bank.

So...no hope on buying UDC

[Beagle]

Balance sheet losses from areas of the business that are likely to go bad look to be contained and manageable within the current capital structure. Slowing growth is going to obviate the need for more capital in the medium term IMO. We know now that extra capital will not be needed to fund the purchase of UDC. So I am of the opinion that a capital raising will not be required in the short to medium term. Having said that, and if I apply wider banking services logic to Heartland itself, the best time to ask a bank for a loan is when you don't really need one. You could apply the same logic to a potential capital raising by Heartland from shareholders! So while I don't expect a capital raising, I am prepared to help fund one if called upon to do so.

SNOOPY

Bingo, you're on to it ! Makes sense to "sure up the ship" just in case.

[Snoopy]

OMG just saw a chart that in the US bank stocks are strongly correlated to long term treasuries. Stocks rise as rates rise (& curve steepens) ...and vice versa

Just as well those things don’t happen in NZ ...or else we could be looking at a capital raise at 45 cents

So the thesis is that as our NZ interest rates fall further, the HGH share price would be expected to fall? This seemed to be the reasoning behind a respected broker I know suggesting that all of their clients get out of bank shares late last year. Of course with hindsight this was excellent advice (which I didn't follow!), although all of this was well before Covid-19 which just may have had something to do with the decline of bank shares as well.

I 'sort of' get the idea, so I will explain it as best as I can understand it. Interest rates are low when the demand for borrowing is low. The Reserve Bank lowers interest rates when trying to stimulate the economy. However, on the other side of the lending ledger, there must still be some incentive for depositors to put their money in the bank. So banks have to pay slightly over the odds to depositors to keep them even slightly interested in putting a term deposit with the bank at what seems an historically low interest rate. Thus the margin between what a bank pays out in interest and what a bank charges in interest becomes squeezed. And when the interest margins become squeezed, then profits become compressed. This all seems logical and makes sense.

Except..... when I look at actual examples, like Heartland and Westpac, and consider what has happened to the interest margin as interest rates have declined, the theory appears to be hogwash. Because no decline in interest margin is apparent at all. If anything the margin looks to be getting larger as interest rates decline.. The following table contains information extracted from p76 of the Westpac Annual Report from 2019. The Heartland information has been calculated by me here:

https://www.sharetrader.co.nz/showth...ighlight=Story

	FY2019	FY2018	FY2017	FY2016	FY2015
Westpac Interest Rate Margin	2.12%	2.13%	2.06%	2.10%	2.09%
Heartland Interest Rate Margin	4.31%	4.41%	4.43%	4.37%	3.91%

Would anyone care to explain that to me?

SNOOPY

[Snoopy]

I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.

Reverse Mortgages

I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:

FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m

We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.

FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m

Motor Vehicle Finance

My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11.3m

Because I am modelling finance deals with a three year life, this annual loss compounds.

Business Finance

No change

Rural finance

No change

Harmoney and Other Consumer Lending

The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.

	FY2021	FY2022
Baseline Reference Profit	$74.5m	$74.5m
Reverse Mortgage Adjustment	$18m	$23m
Motor Vehicle Finance Adjustment (New)	($11.4m)	($17.1m)
Motor Vehicle Finance Adjustment (Used)	($11.0m)	($22m)
Business Finance (Part 1) Adjustment	($5.3m)	($2.1m)
Business Finance (Part 2) Adjustment	($15.5m)	($15.5m)
Rural Finance Adjustment	$0m	$0m
Harmoney and Other Consumer Lending Adjustment	($3.6m)	($3.6m)
Total Forecast NPAT	$45.7m	$37.2m
No. Shares on Issue	581.0m	581.0m
Earnings Per Share	7.9cps	6.4cps

In light of my realization that 0% growth in the Reverse Mortgage portfolio actually equates to some 6.7% receivables growth (because all of the interest is compounded, not collected) I am redoing the 'Reverse Mortgage' profit calculation that I fed into this Scenario.


2/ Reverse Mortgage Adjustment

I had assumed a 'steady' Reverse Mortgage market. But because the interest on Reverse Mortgages are compounded and not collected, even a steady Reverse Mortgage market means the receivable book will grow by about 6.7% per year. I am going to add to this an extra 2.5% increment (for a total of 9.2%) to model a modest real growth in the reverse mortgage portfolio going forwards,

Reverse Mortgage Balance at EOFY2019: $1,318.8m

Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.092 x 1.092 = $1,572.6m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,572.6m - $1,318.8m = $253.8m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $253.8m = $33.0m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.092 x 1.092 x 1.092= $1,717.3m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,717.3m - $1,318.8m = $398.5m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $398.5m = $51.8m

So putting this updated information into our scenario table.

	FY2021	FY2022
Baseline Reference Profit	$74.5m	$74.5m
Reverse Mortgage Adjustment	$33.0m	$51.8m
Motor Vehicle Finance Adjustment (New)	($11.4m)	($17.1m)
Motor Vehicle Finance Adjustment (Used)	($11.3m)	($22.6m)
Business Finance (Part 1) Adjustment	($5.3m)	($2.1m)
Business Finance (Part 2) Adjustment	($15.5m)	($15.5m)
Rural Finance Adjustment	$0m	$0m
Harmoney and Other Consumer Lending Adjustment	($3.6m)	($3.6m)
Total Forecast NPAT	$60.4m	$65.4m
No. Shares on Issue	581.0m	581.0m
Earnings Per Share	10.4cps	11.3cps

SNOOPY

[winner69]

I nteresting stuff on NIMs Snoops but I assume punters also assume that as rates fall lending growth and bad debts could also key factors in assessing bank profitability ... in tight times adversely?

But back to banks share prices being correlated to long term interest rates it probably comes down to market sentiment (ie valuation multiples)

Declining interest rates implies stuffed economy etc and that makes punters sad and they mark bank stocks down (irrespective of what's happening to NIMs)