HGH - Heartland Group Holdings

[Beagle]

A bit off topic but why have a rainy day fund at all ?
Serious health issues, temporary loss of income and similar are not uncommon issues. Well regarded American financial commentator Suzie Orman explains https://www.suzeorman.com/blog/emergency-fund-101/

[winner69]

A bit off topic but why have a rainy day fund at all ?
Serious health issues, temporary loss of income and similar are not uncommon issues. Well regarded American financial commentator Suzie Orman explains https://www.suzeorman.com/blog/emergency-fund-101/

Our own esteemed Mary says the same

Good to see Mary honoured for her services to financial literacy education

Seeing we on Heartland thread seems jeff will have to wait longer for his knighthood

[Snoopy]

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.

Jeff sees a bright future in Reverse Mortgages. But I wonder if this whole loan category is being overhyped? Let me explain...

On page 8 and 9 in Annual Review 2019, there is a big pie chart of receivables. The biggest slice of the pie is "Reverse Mortgages", up 19.4% from $1104.5m to $1,318.8m. Great for shareholders. I see the current Heartland Senior's reverse mortgage rate is 6.5% compounding monthly (https://www.heartland.co.nz/reverse-...age-calculator).

6.5% compounding monthly equates to a bill of 6.5%/12 = 0.5416% per month. Over the year this interest rate compounds 1.005416^12 = 6.7%

So the accrued interest during the year must have been something like:

$1,104.5m x 0.067 = $74m

Now, the key word in the above sentence is accrued. The interest would be booked into Heartland's profits. But it would then go onto the Heartland books as an account receivable, boosting the size of the Reverse Mortgage Account Receivable pie graph slice. This process would go on, on average over 6 years, Contrast this to most of the other loans where Heartland actually collects interest owed, with interest paid each period in cash. The actual growth in the size of the underlying new customer book for Reverse Mortgages over FY2019 was therefore:

( $1,318.8m - $74m) / $1,104.5m = +12.7%

That is still good. But it is well below the 19.4% growth figure printed on the PIE graph. And it is below the growth rate of Motor Vehicle Finance listed at 13.3%. My conclusion is that 'Reverse Mortgages' are not quite the growth engine that Heartland are telling us they are. And in today's interest rate environment, how long will Heartland be able to sign up business at what seems to be an exorbitant annual equivalent mortgage interest rate of 6.7%? Especially since the Australian government is under pressure to reduce the Federal Supplementary Income reverse mortgage scheme rate down from an 'exorbitant' 5.25% (edit: new Oz government rate is 5.15%)

SNOOPY

[Beagle]

All mortgages charge interest or compound monthly so its best to stick to the headline rate when comparing them.
https://www.interest.co.nz/borrowing
Table below shows well respected TSB bank charging 5.34% on a standard variable home loan so 6.5% for a reverse equity loan with guarantees you won't lose your home do not look exorbitant to me.

[winner69]

I for one would be very disappointed if Jeff comes out and says there's a $20m or so hit to profit because of Covid

Jeez, he seemed OK with $77m to $80m about 3 months ago and the year end is nigh ...and he's said nothing

No news is good news

[King1212]

That would make a class action master winner....that a big drop of forecast.

[Snoopy]

I have been looking at some motor vehicle year to date sales figures.

https://www.mia.org.nz/Portals/0/MIA...es%20Table.xls

Kia right on top in the lockdown month of April, even outselling perennial market leaders Toyota. And Heartland are the ones that finance Kia sales - wow! YTD Kia is in 5th place just behind Holden (also financed by Heartland). Kia being a 'budget' brand might grow. They seem to be having great success with the new Seltos small SUV. Let's say sales grow 10% in FY2021. Yet Holden is a zombie company now, so that part of the Heartland business will probably disappear altogether in three years as present day Holden loans unwind. Jaguar/Land Rover are the other brand financed by Heartland, as are Hino trucks. But they are both niche players and don't appear on the top 15 sales statistics.

Jaguar Land Rover are having some sales issues globally but seem to be running hot in New Zealand.

https://www.driven.co.nz/news/did-th...-back-in-1948/

“For Jaguar, sales have experienced an increase of over 100 per cent since the launch of the F-Pace in 2017 and subsequent launches of the E-Pace and the EV I-Pace. Land Rover, too, has experienced double-digit percentage growth year on year thanks to the growth of the category but also having models with high-performance attributes."

Prestige brands generally slow in sales during a recession though. So I am picking JLR sales might halve this calendar year.

So what will all this do to Heartland's financing of new vehicles? Well, Heartland's financial year ends on 30th June. Only three months of the year will be 'post lockdown', so things might not be as ugly as some think. Particularly as dealers look to quit excess stock with sweet finance deals. Bad for motor dealers but ironically good for Heartland,

The market is always forward looking though. So the real interest is, what will motor vehicle finance look like in FY2021? If you are Heartland, don't look in the mirror. You will see 'ugly'. If the base case for funding new vehicles is split for FY2020 45:45:10 between Holden:Kia:JLR (an educated guess) then FY2021 is likely to look like 0:50:5 on the same scale. That means new car financing down 45%.

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?

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 = -$11m

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

Forecast Profit

	FY2020	FY2021	FY2022
Jeff	$77-$80m	NM	NM
Snoopy Scenario 1 (my post 13361)	NM	$38.7m	$32.2m
Snoopy Scenario 2 (my post 13392)	NM	$45.7m	$37.2m

I have put my motor finance posts together so that readers can see at once the whole sorry story. It is motor vehicle financing that is torpedoing any potential Heartland profit recovery in FY2022 as I see it, The problem is there is a 'lag effect' on Heartland profits as the much smaller sized future new car loan book ripples through the system. I am assuming that all of the profits from signing a three year finance deal on a motor vehicle are not booked in year 1. I am imagining motor vehicle finance profits are booked as the annual use by the customer of the vehicle is accrued. But no doubt there are enough clever people reading this to correct me if I am wrong.

The shutting down of Holden is a big part of this projected two year profit decline. It is true that Heartland has Kia as a reasonably priced alternative brand to finance. Heartland backed 'Kia Finance' only started operating on 4th November 2019. The official line is that the Holden brand will be retired "by 2021". But in reality it looks like most of the Holden stock of cars will be sold off by the end of June 2020. That doesn't leave much overlap between the two brands from a financing perspective. And the JLR luxury brands are likely to fall into their own recession induced finance hole too (as I previously noted) I wish I had better news for Heartland shareholders going forwards. But if motor vehicle loans work on average in three year cycles, we are looking at three solid down years before Heartland finds a 'new motor vehicle' sales base. The only hope I can see out of this is if Jeff signs a new finance marque partnership - he did do the Kia deal last year after all.

SNOOPY

[Beagle]

Jeff will be Snooping, (sorry couldn't resist) around other marques but all will have existing arrangements and Holden were the 4th biggest brand in N.Z. with 8% market share.
That said Snoopy, its evident demonstrators and unsold stock as well as Holden trade-in's will be around for many years to come...a brand that size doesn't simply disappear from N.Z. roads overnight. Holden dealers still have lots of unsold stock to last them well into 2021 in my opinion. Then all those Holden owners will turn their vehicles over every so many years. At least with vehicle finance you have something to repossess when times get tough. Try repossessing used commercial kitchen equipment under an open for business loan and you'd be lucky to get 10 cents on the dollar in today's hospitality market.

Its open for business and unsecured Harmoney loans that have the most potential to be anything but harmonious in my opinion.

[Baa_Baa]

Have you looked at what the Holden dealers are diversifying into? They’re backing Holden to clear brand name stock, at big discounts, but also for long term service and support, and also putting up other marques for sale. Survival.

[Snoopy]

Have you looked at what the Holden dealers are diversifying into? They’re backing Holden to clear brand name stock, at big discounts, but also for long term service and support, and also putting up other marques for sale. Survival.

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