HGH - Heartland Group Holdings

[RTM]

If that is from Simply Wall Street,all I can say is their research remains really bad.

So should we therefore sell SKL and ABA ?

[percy]

So should we therefore sell SKL and ABA ?

You can buy/sell whatever you want.
I myself am happy to hold a modest holding in SKL,and a large holding in HGH,
ABA I do not have an opinion on,while CMO has been a great performer for those who hold,however I hold TRA,which I expect will be a great performer over the next few years..

[Snoopy]

The objective of this post is to consider cash flow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2019 is derived from note 23 in AR2019 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities'.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2014 Financial Receivables Maturity: Contracted/ Expected	FY2015 Financial Receivables Maturity: Contracted/ Expected	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected	FY2018 Financial Receivables Maturity: Contracted/ Expected	FY2019 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$50.254m / $50.254m	$37.012m / $37.012m	$84.154m / $84.154m	$57.040m / $57.040m	$49.588m / $49.588m	$80.584m / $80.584m
0-6 months	132%	$477.190m / $629.445m	$664.557m / $877.215m	$743.389m / $961.274m	$618.271m / $816.118m	$609.268m / $804.234m	$1,020.160m / $1,346.611m
6-12 months	132%	$367.564m / $483.727m	$450.638m / $594.842m	$484.420m / $639.962m	$521.215m / $688.004m	$469.632m / $619.914m	$646.123m / $852.882m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2014 Financial Liabilities Maturity: Contracted/ Expected	FY2015 Financial Liabilities Maturity: Contracted/ Expected	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected	FY2018 Financial Liabilities Maturity: Contracted/ Expected	FY2019 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$629.125m / $18.922m	$748.332m / $22.450m	$718.587m / $21.630m	$836.829m / $25.189m	$924.072m / $27.815m	$895.210m / $26.946m
0-6 months	32.4%	$748.129m / $242.431m	$1,213.450m / $395.102m	$892.944m / $289.314m	$1,191.957m / $386.194m	$1,345.316m / $435.882m	$1,531.594m / $496.236m
6-12 months	36.4%	$538.050m / $195.682m	$686.159m / $249.762m	$837.844m / $304.975m	$729.145m / $265.409m	$572.731m / $208.474m	$620.836m / $225.984m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Deposit Maturity	FY2014: 'Expected' combined Loan and Deposit Cashflow	FY2015: 'Expected' combined Loan and Deposit Cashflow	FY2016: 'Expected' combined Loan and Deposit Cashflow	FY2017: 'Expected' combined Loan and Deposit Cashflow	FY2018: 'Expected' combined Loan and Deposit Cashflow	FY2019: 'Expected' combined Loan and Deposit Cashflow
On Demand	$31.332m	$14.562m	$62.524m	$31.851m	$21.765m	$53.620m
0-6 months	$387.014m	$482.113m	$691.960m	$429.924m	$368.352m	$850.375m
6-12 months	$288.045m	$345.080m	$334.987m	$422.595m	$411.440m	$626.898m
Total	$706.391m	$841.755m	$1,089.471m	$884.370m	$801.557m	$1,530.893m

Time to update the "Liquidity Buffer ratio" for FY2019.

Dear old Colin has now 'left the building', but what better way to immortalise his contribution to society than continuing with the 'Meads Test', and the 'solid as' quote with which he will alwys be identified? When Colin told us all those years ago that a certain finance company was 'solid as' with reference to investing debenture money, the end result was that this cash became tied up in illiquid property developments. So although the company had enough money to pay out their debenture holders 'on paper' and appeared to be operating profitably, the debenture holders could not get their cash back. The 'Meads Test' (as coined by Snoopy) is one method of finding out if a finance sector company really is 'solid as'. The basic data I need to check this out has already been calculated (see above). So let's get going.

To check out the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Expected Net Current Loans Outstanding) > 10%

On the numerator of the equation, we have borrowings.

HGH Borrowings

1/ Term deposits lodged with Heartland.	$3,153.681m
2/ Bank Borrowings	$25.002m
3/ Securitized Borrowings total	$659.135m
4/ Certificate of Deposit	$34.836m
5/ Unsubordinated Notes	$337.681m
Total Borrowings of (see note 13)	$4,210.334m

Note 15 does not contain a clear breakdown of current and longer-term borrowing amounts and their maturity dates.

Banking facilities are provided by CBA Australia, and another unnamed supporting bank, but for both Australia and New Zealand. These facilities are, I believe, in relation to the Australian part of the 'Seniors Reverse Mortgage Portfolio'. These banking facilities are secured over the homes on which the reverse mortgages have been taken out. These CBA loans have a maturity date of 30th September 2022. That means they are classed as ‘long term’ for accounting purposes (talking from a 1st July 2019 looking forwards perspective). And that means Heartland can’t rely on CBA Australia as a source of short-term funds.

The information given in note 15 on the securitized borrowing facilities is as follows:

Securitized bank facilities total all in relation to the Heartland ABCP Trust 1:	$nil	dissolved on on 29th August 2018
plus Securitized bank facilities total all in relation to the Heartland Auto Receivables Warehouse Trust 2018:	$NZ150m	(undrawn)
plus Senior Warehouse Trust Securitisation Facility 2018:	$A650m	maturing 30th September 2022
less Current level of drawings against these facilities	$A631m
equals Borrowing Headroom	$NZ150m + $NZ20m (1) = $NZ170m	{A}

(1) Using 30th June exchange rate NZD1 = AUD0.95639


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.

SNOOPY

[stoploss]

Heartland just reduced the rate on its reverse rate mortgage to 6.95 % fyg.

[Snoopy]

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018, Heartland Group Holdings restructure set up
Average FY2015 to FY2019 inclusive	8.20cps

I have chosen to use the last five years of operation as indicative, as these years include the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018: Heartland Group Holdings restructure set up
FY2020	6.5cps + ?.?cps
Average FY2015.5 to FY2019.5 inclusive	8.80cps

I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

SNOOPY

[Snoopy]

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.2c / (0.72 x 0.075) = $1.52

A reminder here that NTA was

($654.150m - $73.085m) / 565.430m = $1.03 cps

at the half year FY2019 balance date. This means my fair valuation is at a good premium (+48%) to asset value.

This $1.52 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.22 to $1.82. $1.41, where the share is trading today, looks a little below fair value. Take off the upcoming 3.5c dividend and we get down to an equivalent $1.375. That is a 10% discount to fair value. I therefore see HGH as worth accumulating at $1.41.

discl: New shareholder, in at $1.38

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.8c / (0.72 x 0.075) = $1.63

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.63 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.

SNOOPY

[Beagle]

https://www.goodreturns.co.nz/articl...5+October+2019

In other news, gosh, term deposit rates have really hits the skids. Nothing over 2.90% even if you invest for several years !
Don't bother shopping the other banks for term desposits, all the well recognised ones are all under 3%
https://www.heartland.co.nz/savings-...interest-rates
Rates at Heartland are negotiable for amounts of $250K or more.

[Beagle]

Read through the Heartland Annual review today.
My mate Crackity reckons you should read annual reports from the back these days. He's more cunning than a hungry Beagle. Doing so would save the reader 39 pages of seriously OTT ESG caproate spiel. If you must read from the front, just start at page 40 and save yourself a ton of pc rubbish.

[RTM]

Read through the Heartland Annual review today.
My mate Crackity reckons you should read annual reports from the back these days. He's more cunning than a hungry Beagle. Doing so would save the reader 39 pages of seriously OTT ESG caproate spiel. If you must read from the front, just start at page 40 and save yourself a ton of pc rubbish.

Yes....it sounded like a Social Services Company....not a bank making money for shareholders.
Is that what you meant ?

[Beagle]

Yes it was nauseating to say the very least.