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  1. #13411
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    Default Heartland Profit Forecast: FY2021 & FY2022 (Scenario 1b)

    Quote Originally Posted by Snoopy View Post

    I am going to base my earnings estimates on the normalized profits of Heartland in FY2019, before this Covid-19 thing hit

    Heartland FY2019 (Normalised Profit): $73.617m+ 0.72x($1.8m+$1.3m+$1.1m) -$1.936m -$0.173m =$74.532m

    I am going to use FY2019 as my 'base case' because that result contains no impact of Covid-19.

    Notes on Normalising Profit

    1/ I have adjusted for the $4.2m in costs associated with listing on the ASX. Specifically this included $1.8m of corporate restructure and ASX listing costs, a $1.1 million dollar break fee due to the early repayment of a Tier 2 Australian Subordinated bond and $1.3m in foreign currency costs also related to the corporate restructure (See 'Annual Review FY2019 p40).
    2/ I have removed the $1.936m fair value movement of investment property gain, and the $173k gain on sale of investments.

    The adjustments I make below are based on what I believe will be a fairly significant changes in 'borrowing attitudes' and 'business opportunities' going forwards.

    Reverse Mortgages

    Jeff has a fairly bullish view on the growth prospects for reverse mortgages going forwards, at least for FY2020 By contrast I believe the reverse mortgage market will be flat by FY2021. My reasoning for this is that in a rising property market, oldies can feel good about taking out a reverse mortgages because the value of their home is increasing consummately and their overall wealth is not going down. By contrast, when property prices fall, not only is any capital they spent on a reverse mortgage lost. The interest charges very obviously burrow into the oldies remaining savings as well. I am not saying that all reverse mortgages for capital expenditure will stop. If a pensioner needs capital for a hip replacement or to purchase unfunded cancer drugs or to visit a faraway relative they will still borrow. But they might not borrow to update their car, or for an annual holiday in the sun. Many of the oldies have frugality built into their character. It is a psychological mindset that I think will see reverse mortgage growth stall.


    Motor Vehicle Finance Adjustment

    So what does this picture suggest for profitability in FY2021?

    As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:

    0.45 x $500m = $225m worth of finance business in turnover.

    Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:

    0.15 x $225m = $34m

    Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m.

    I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022.

    Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of $63m, or a 15% drop.

    Lot's of figures pulled out of the air here.

    Anyone like to comment if I am on the right track?

    Business Finance (Part 1): O4B


    So what does this picture suggest for profitability in FY2021?

    'O4B' was 3% of the Heartland bank loan book in December 2019, with $158m of loans on the books.

    Heartland has been earning an ROE of more than 15% on this O4B portfolio.
    If O4B sinks, then the annual tax profit loss for Heartland will be about:

    0.15 x $158m = $24m

    That is likely an overestimate as O4B also offers partially secured loans of up to $250,000 (well beyond the $100,000 limit of the NZ government scheme) and secured and unsecured loans into Australia. Those boundaries are beyond the IRD scheme. I would estimate the actual annualised profit hit to be 80% of my calculated figure, or around $19m. I estimate the IRD loan scheme may have brought forward about three months worth of loan applications that otherwise might have gone through O4B. If the IRD scheme is dropped on 12th June as planned, then the impact flowing into FY2021 may only be a couple of months. That equates to a reduction in FY2021 profit of $19m x 2/12 = $3.2m.

    If the remaining 'outside of government scheme boundary' loans profit of $5m were to sink by 10%, then that would knock $0.5m off annual profits going forwards.

    Likewise if the residual O4B loan profit balance of $19m- $3.2m = $15.8m were to reduce by 10%, that would wipe $1.6m off annual profits.

    Now putting these three effects together, the expected annual profit decreases from the base year of FY2019 are as follows:

    FY2021: -$3.2m - $0.5m - $1.6m = -$5.3m
    FY2022: - $0.5m - $1.6m = -$2.1m

    Business Finance (Part 2): Business Intermediated & Business Relationship

    So what does this picture suggest for profitability in FY2021?

    'Business Relationship' lending fell by 16% in FY2019 to $559.4m (Annual Review FY2019 p9), and I expect this trend to continue into FY2020 and FY2021. This means I am projecting the 'Business Relationship' loan book to be down to:

    $559.4 x 0.84 x 0.84 = $395m

    That number corresponds to the receivables book shrinking by $165m. We are told ROE for these loans is between 0% and 11% (AGM2019 Presentation p15). If the closed out loans averaged an ROE of 6%, this would represent a drop in Heartland profit from FY2019 levels of:

    $165m x 0.06 = $10m

    I am predicting that when some of the lending through intermediaries starts to shrink, Heartland will renew their interest in writing business relationship loans directly. So I see no further shrinkage in profit from this category between FY2021 and FY2022.

    'Business Intermediated' lending is projected to grow in FY2020.

    But I think that by FY2021, it will shrink back down 10% below FY2019 levels (down to $425.4m x 0.9 = $383m, a decrease of $42m). My reason for believing this is that there will be lower tradie activity in FY2021, and sensible tradespeople will have transferred to IRD backed ultra low interest loans, at least in NZ. The silver lining of this is that by existing Heartland customers effectively refinancing with the government, many bad debts to Heartland will be avoided. Business Intermediary loans have an ROE of between 11% and 15% (AGM2019 Presentation p15). If we assume the average margin is 13%, this will represent a loss of profit for Heartland in FY2021 of:

    $42m x 0.13 = $5.5m

    The kind of business loans sought by Heartland tend to be short term. So I am not expecting the general reduction in business loans to have a compounding effect year on year.

    Rural Finance Adjustment

    Rural finance at Heartland is transitioning between 'all of business funding' to funding seasonal assets. The former is far less profitable than the latter. So while I am expecting the rural loan book as a total receivable value to shrink, I am picking the Rural finance profit to remain flat,

    Harmoney and Other Consumer Lending

    Harmoney' reported their first profit, after an accounting standard change, of $7.22m over FY2019. Included in these calculations were a recognition of tax loss assets of $4.85m and deferred R&D expenses of $4.74m. Before these adjustments, 'Harmoney' lost $233,000 in the year to March 2019. At EOFY2019, 'Harmoney' had $367m of financial receivables on the books. 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 not survive the post Covid-19 and will be wound down in an orderly way mid way through FY2021. Other consumer lending should be OK.


    FY2021 FY2022
    Baseline Reference Profit $74.5m $74.5m
    Reverse Mortgage Adjustment $0m $0m
    Motor Vehicle Finance Adjustment ($11.4m) ($17.1m)
    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) ($7.6m)
    Total Forecast NPAT $38.7m $32.2m
    No. Shares on Issue 581.0m 581.0m
    Earnings Per Share 6.7cps 5.5cps

    I am hoping the real results won't be as gloomy as this.
    On reflection, I have decided that I need to make three tweaks to my 'profit of gloom' scenario.

    1/ Motor Vehicle Finance Adjustment

    I had assumed that used vehicle financing would not be affected. I now think I should align this outlook with what I proposed in Scenario 2. That means a used market down by 10% in revenue.

    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.

    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.

    Reverse Mortgage Balance at EOFY2019: $1,318.8m

    Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.067 x 1.067 = $1,501.4m
    Incremental Receivable Gain EOFY2019 to EOFY2021: $1,501.4m - $1,318.8m = $182.6m

    Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $182.6m = $23.7m

    Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.067 x 1.067 x 1.067= $1,602.0m
    Incremental Receivable Gain EOFY2019 to EOFY2022: $1,602.0m - $1,318.8m = $283.2m

    Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $283.2m = $36.8m

    3/ Business Finance (Part 1): O4B

    The 'O4B' business loan scheme may be affected more than I originally thought. The O4B balance at SOCY2020 was $158m (from Company factsheet 2020) . I am continuing to assume that the smaller loan end of the business will be wiped out for two months in FY2021, due to flow on competition from 0% IRD loans. The IRD loan scheme does not cover loans between $100,000 and the O4B ceiling of $250,000, nor does it cover Australian loans. I am going to assume the portion of the O4B loans that overlaps with the IRD loan scheme is 80% by value.

    I can calculate this profit loss over two months (and using a minimal ROE multiple from AGM 2019 Presentation p16 = 15%) of no O4B business as follows:

    0.15 x (0.8 x$158m) x 2/12 = -$3.2m

    The remaining O4B 'outside of government scheme boundary' loans have revenue of: $158m x 0.2 = $31.6m. If this revenue were to sink by 15% (0.15 x $31.6m = $4.7m), then that would knock 0.15 x $4.7m = -$0.7m off annual profits going forwards, over one year.

    Likewise the previously described smaller loans category ( $158m x 0.8 = $126.4m of Revenue), if it were to lose 15% of that revenue would lose 0.15 x $126.4m = -$19.0m. That $19m revenue loss would equate to a profit reduction of 0.15 x $19m = $2.9m over any year. But for FY2021 we are already modelling the wiping out of two months of profits. So the profit loss for the remaining ten months is:

    (10/12) x -$2.9m = -$2.4m

    Putting these effects together, the expected annual profit decreases for O4B from the base year of FY2019 are as follows:

    FY2021: (-$3.2m -$2,4m) - $0.7m= -$6.3m
    FY2022: -($2.9m) - $0.7m= -$3.6m

    Now let's incorporate these three changes into our table and see what happens.

    FY2021 FY2022
    Baseline Reference Profit $74.5m $74.5m
    Reverse Mortgage Adjustment $23.7m $36.8m
    Motor Vehicle Finance Adjustment (New) ($11.4m) ($17.1m)
    Motor Vehicle Finance Adjustment (Used) ($11.3m) ($22.6m)
    Business Finance (Part 1) Adjustment ($6.3m) ($3.6m)
    Business Finance (Part 2) Adjustment ($15.5m) ($15.5m)
    Rural Finance Adjustment $0m $0m
    Harmoney and Other Consumer Lending Adjustment ($3.6m) ($7.6m)
    Total Forecast NPAT $50.1m $44.9m
    No. Shares on Issue 581.0m 581.0m
    Earnings Per Share 8.6cps 7.7cps

    That is a significant improvement on my earlier version of this forecast, albeit still well down on FY2019 levels of profitability.

    SNOOPY
    Last edited by Snoopy; 13-08-2020 at 05:31 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  2. #13412
    ShareTrader Legend Beagle's Avatar
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    Quote Originally Posted by Snoopy View Post
    In Christchurch the local Holden dealer sells Mazda as well. When I went to visit the Kapiti Coast, the Holden dealer there also handles Kia and Suzuki. All these arrangements were in place before Holden 'pulled the plug'. Some dealers will continue to represent the brand for service and support. But not all. The Kapiti dealer I noticed has ripped down all Holden branding from the building quick smart, and there is not a Holden to be seen on site.

    Yet all this is moot, because IIRC the financing agreement with Heartland was with 'Holden New Zealand', not the individual dealers. Holden New Zealand will be winding down new vehicle sales by 2021. There may be a very few unsold models out the back of dealers yards in Auckland come new year. But they'll probably be registered as demonstrators and sold on as used cars. The press releases I have read are very clear. By 2021 Holden New Zealand will be gone from the new car market. That means there will be no new Holden sales approved for finance via Heartland by Holden New Zealand from that point. Of course there will still be used Holden cars around. But Heartland will no longer have an exclusive deal to finance those sales. And future Holden sales will be at used vehicle prices, which will require a lower dollar level of funding like all used cars. That's how I read the situation.

    SNOOPY
    Fair point but that doesn't stop HGH financing used Holden's. FWIW My local dealer has been selling Suzuki's and Kia's as well as Holden's for years and is quite happy to have a significant stock of Holden's still on his yard. I wouldn't get too concerned about the loss of business to Holden N.Z. Jeff will snoop around and find some other brand to finance

    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.
    Last edited by Beagle; 02-06-2020 at 10:44 AM.
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    Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine

  3. #13413
    percy
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    http://nzx-prod-s7fsd7f98s.s3-websit...034/323702.pdf
    HGH did not buy UDC.
    ANZ has announced they are selling UDC to Shinsei Bank for $762 million.
    Price to book ratio 1.2.

  4. #13414
    ShareTrader Legend Beagle's Avatar
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    Quote Originally Posted by percy View Post
    http://nzx-prod-s7fsd7f98s.s3-websit...034/323702.pdf
    HGH did not buy UDC.
    ANZ has announced they are selling UDC to Shinsei Bank for $762 million.
    Price to book ratio 1.2.
    Thanks Percy. As we all know, Japanese interest rates are zero and ANZ have been capital constrained for some time. Shinsei bank will have access to extremely cheap capital in considerable abundance so therefore UDC will be far more formidable competitors going forward.

    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
    Last edited by Beagle; 02-06-2020 at 11:05 AM.
    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

  5. #13415
    Speedy Az winner69's Avatar
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    Heartland makes lot more money than UDC

    UDC receivables $3.4 billon npat $24m
    Heartland receivables $4.6 billion npat $80m (so Jeff says)
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  6. #13416
    ShareTrader Legend Beagle's Avatar
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    Well...that's what he said several months ago. I expect a downgrade this month.
    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

  7. #13417
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    Quote Originally Posted by winner69 View Post
    Heartland makes lot more money than UDC

    UDC receivables $3.4 billon npat $24m
    Heartland receivables $4.6 billion npat $80m (so Jeff says)
    Winner, the balance date for UDC has traditionally been 30th September. So I think that $24m profit mentioned in the profit release might be a half year figure. The full year profit for FY2018 for UDC was $65.3m.

    SNOOPY
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  8. #13418
    Speedy Az winner69's Avatar
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    Quote Originally Posted by Snoopy View Post
    Winner, the balance date for UDC has traditionally been 30th September. So I think that $24m profit mentioned in the profit release might be a half year figure. The full year profit for FY2018 for UDC was $65.3m.

    SNOOPY
    So don’t believe everything on the internet eh but it does seem it was half year

    https://www.udc.co.nz/comm/about_us/media_article/article/26651/0/0/udc-finance-half-year-profit-up-6percnt;-to-$34.7-million.html?type

    By comparison then Heartland pretty useless

    Must be those home equity release things being a drag.
    Last edited by winner69; 02-06-2020 at 11:53 AM.
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  9. #13419
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    Quote Originally Posted by Beagle View Post
    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.
    Yep, this one of the things that make this market downturn different to previous ones isn't it. Makes it really hard to know if we'll see the gradual decline over the coming months that many of us are predicting, or if we'll start to see the traditional conservative TD money pouring in in search of yield, further bolstering the younger Sharesies like influx we've seen over the last couple of months?

    Caught up with my parents over the long weekend...Mary Holm seems to have Mum convinced that she needs to chuck a bunch of cash at a NZX50 ETF. I'm like, yeah, sure, if you're not in your 70s and you're pretty confident it's going to head north in the short/medium term. For me personally, until such confidence returns, my KiwiSaver stays in a cash fund. Meanwhile, I'll dabble selectively with a handful of stocks, not the entire NZX50.

    Back to HGH and liquidity, my parents have money with them on TD...and like plenty others I expect...if they suddenly decide that they need to throw that towards the sharemarket, what impact will that have on HGH funding? Are they in a position to issue bounds in exchange for cheap money? SPP next option?

  10. #13420
    ShareTrader Legend Beagle's Avatar
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    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.
    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

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