HGH - Heartland Group Holdings

[King1212]

Great one Snoopy! Wonder what background u from? Banker or accountant?

[winner69]

Great one Snoopy! Wonder what background u from? Banker or accountant?

His signature is a clue kingie

[Snoopy]

Great one Snoopy! Wonder what background u from? Banker or accountant?

The background isn't important Kingie. To produce a bit of analysis like that my rules are.

1/ Have a clear picture of your end objective.

2/ Have the patience to follow through with the nuts and bolts that lead you to your objective (the objective is your strong motivation here).

3/ Don't get frightened if the whole thing starts to look too complicated. Realise it is all built on 'simple steps', that can usually be done one at a time (even if the whole thing takes a while).

4/ If it all starts to get too hard, 'step away for a day'. It is surprising what insights you can get by coming back to a problem.

5/ If you can summarize the whole thing in a single table or graph, that is often the best tool to use to explain it to others

SNOOPY

[Snoopy]

Reverse equity loans should be very sound as should livestock lending. The rest of their lending has too many unknowns, for me to try and guess the level of defaults
However I doubt we will get any clarity until late next year.

CLARITY.[saves guessing]
Bit of excellent clarity here.Easy to see why it is my largest investment.From PAZ's 6th August announcement.
' Sales have increased by more than 85% in the past two years, profit has more than tripled and we continue to expand at pace,”
“We are in the right sector at this time. Demand continues to be strong, and we are confident this will continue through an economic downturn. Historically in times like this, people have tended to focus
on health and wellbeing – so our natural dietary supplements and ingredients and strong New Zealand brand should hold us in good stead.”

I agree the thing that is missing at Heartland from an investment perspective is clarity Percy. But, strange as it may seem to you, I do not need clarity. Most human activities revolve around making definite decisions. What sort of job do you want? What do you fancy for dinner? What person do you partner up with? These questions tend to have singular answers. Because so many decisions require us to make a 'definite choice', not having to choose seems strange. With investments you can choose. But you don't have to -all the time. And I would argue there are occasions where you should not choose. This is one of them IMO. Choosing the path where you think Heartland will go is too difficult, at least it is for me. But I can imagine different paths that Heartland might go down. Each different path has a different consequence. So without choosing a path, I can do a separate thought experiment on all three paths (in this instance) without committing to any one. Then if I assess the likelihood of going down the alternative paths I can come up with a 'weighted probability combination' of my three scenarios without choosing any particular one. This is investing 'without clarity'.

Some might say why not just wait until the path forwards becomes clearer? That is a legitimate alternative investment approach. But my reason for 'going early' is to capture the market price discount that has arisen because of a lack of clarity. Remember, markets do not like uncertainty. The market price discount will disappear if I wait, but the risk will reduce as well. In the end it comes down to what kind of risk you are comfortable with. For example, investing on the 'Unlisted market', e.g. Paz, contains risks that are not present with putting money an NZX listed company. Different people have different appetites for different types of risks. And there is nothing wrong with that!

SNOOPY

[King1212]

Thanks Snoopy! To be honest...HGH is a well managed company. My first share investment. Sold before it crashed...now I am starting to accumulate

[Snoopy]

Talk on the news tonight (if Auckland goes into a protracted lockdown) of Grant Robertson thinking of another extension to the wage subsidy program. Just keep on with the stimulus and printing money...what could possibly go wrong

My sense is this virus is a really big problem that's going to come back and bite over and over and over again. My nose for trouble is telling me there's a heck of a lot coming. I hope I'm wrong.

To me Snoops me ol mate. Your optimistic view suggests you are fond of smoking a certain substance that we're supposed to be voting on whether to legalize or not.
Its fantasy land stuff mate, sorry, but I have to call it as I see it. There is no way in the world that's going to happen. I think your mid point scenario should be your optimistic one and your pessimistic scenario looks most realistic to me.

Beagle, I invite you read my post 13540 which neatly summaries the driving forces behind my 'optimistic scenario'. This includes after a couple of years a 20% fall in the new car financing market, a 10% fall in the financing revenue of used cars. A short sharp 20% fall in business in O4B over FY2021, recovering to a 10% decline from the base case in FY2022. A 16% permanent fall in 'Business Relationship' funding. And a 10% permanent reduction in funding to downstream 'to business' lending customers. Oh and Harmoney is chopped in half, while there is no growth in rural lending. All this is in my optimistic scenario remember! This is the best result one might reasonably foresee. And of the three paths that might eventuate, I am only giving this a one in ten chance of happening.

There is one lending class though that drastically changes my 'optimistic outlook'. This is the 'reverse mortgage' business. I think it is worth spending some time explaining the extraordinary rise of 'reverse mortgages' in the 'optimistic scenario result'.

For reverse mortgages, I am going for 8% growth over and above the accumulating compounding interest of 6.7%. This is mid way between last years underlying growth rate for NZ (3.3%) and Australia (13.3%). My logic here is that pensioners will want to travel and splash put on some treats that will be increasingly denied to them as traditional sources of fixed interest income go to zero. They may even choose to finance their recently redundant children into new careers.

The important point here is that my 8% real growth in the reverse mortgage portfolio is not a figure pulled out of thin air. It is the actual growth rate, locked down as a track record that Heartland has already achieved. The other factor that is driving the reverse mortgage business growth is that even if no new business is written at all, then the existing loan portfolio grows by 6.7% per year. Then growth is accelerated by paying 'interest on interest' in a way that compounds until the loan is eventually repaid. It really is an incredible business model. What other business model can you think of where 'strong growth' can be achieved by having no interaction with customers?

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 8% increment (for a total of 14.7%) to model continuing growth in the reverse mortgage portfolio going forwards, This is a similar growth rate to what actually occurred over FY2019.

Reverse Mortgage Balance at EOFY2019: $1,318.8m

Reverse Mortgage Balance at EOFY2021: $1,318.8m x 1.147 x 1.147 = $1,735.0m
Incremental Receivable Gain EOFY2019 to EOFY2021: $1,735.0m - $1,318.8m = $416.2m

Incremental Profit Gain from EOFY2019 to EOFY2021 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $416.2m = $54.1m

Reverse Mortgage Balance at EOFY2022: $1,318.8m x 1.147 x 1.147 x 1.147 = $1,990.1m
Incremental Receivable Gain EOFY2019 to EOFY2022: $1,990.1m - $1,318.8m = $671.3m

Incremental Profit Gain from EOFY2019 to EOFY2022 (using average ROE multiple from AGM 2019 Presentation p16): 0.13 x $671.3m = $87.3m

The last part of the puzzle is the return on equity figure '0.13' that I have used above.

Look at slide 15 in the presentation below.

https://shareholders.heartland.co.nz...esentation.pdf

It shows here that 'reverse equity mortgages' are in the mid range of earnings for lending assets as part of an 11-15% range. So I picked a figure right in the middle at 13% on the incremental equity that Heartland accumulates as the growing loans feed into the system. Have I got any of that wrong? If not, then you have to accept the increase in profit figures that come out of my 'profit forecast' sausage machine as reasonable.

SNOOPY

[percy]

Unlisted.Those who do not trade on it think it is "the wild west".Yet those who do not share their view have no issues.
The main complaint I hear is lack of liquidity.This comment is valid,however it is also true of NZX companies such as AWF,Market cap $41.19 mil,SCT Market cap $137.044 mil, and many others.
Over the years I have owned shares in the following companies on Unlisted;
Rural Equities. Market Cap $137.7 mil.Owners of some of NZ finest farms,Controlled by the Cushing family.A very good company.
Rangatira.Market cap $212.7 mil.Investment company with a strong history of sound investments.Another very good company.
Currently I own shares in three Unlisted companies.
PAZ.Pharmazen.Market cap $126.892 mil.Nutritional ingredients for humans and animals.Right company in the right sector at the right time.
SFF.Silver Fern Farms Co-Op.Market cap $65.346.NZ's leading meat processor.Growing demand for NZ grass feed red meat.
SYF.Syft technologies.Market cap $81 mil.Manufacturer analytical instruments.Growing world wide demand.
PAZ,SFF,and SYF.I have found their reporting excellent.I have phoned each company and have found then honest,open and very forthcoming.Each company have strong boards,great CEOs and very strong balance sheets.Each company is doing what they said they would do.All seem to have very bright prospects.
I have a very large holding in PAZ,a big holding in SFF and a small holding in SYF.

PS Equity ratios,as at their last balance dates....Very interesting.
HGH 12.9% and wait for it........PAZ.....58.49%...Different sectors,different requirements,but four and a half times HGH's.?
Silver Fern Farms CoOp equity ratio was 81.93%.Over six times HGH's.
Syft's equity ratio was 77.51% just six times HGH's.

[winner69]

Please keep debate going ..esp the negatives

Good for share price next week

[percy]

Thanks Snoopy! To be honest...HGH is a well managed company. My first share investment. Sold before it crashed...now I am starting to accumulate

Warren Buffett's Berkshire Hathaway Inc said on Friday it has sold shares of some of the largest US banks, slashing its stakes in Wells Fargo & Co and JPMorgan Chase & Co and exiting an investment in Goldman Sachs Group Inc

[Snoopy]

Leftie ....percy probably got his numbers here

Another rbnz thingie

https://bankdashboard.rbnz.govt.nz/summary

Heartland stand out on the non-performing loans chart ...sort of says when you look at returns charts Heartland takes more risk for greater returns

The comparative bank profitability chart on Winners link makes HBH look ok, Snoopy will be happy.

I have pinched these two posts from the 'Banks Stocks' thread, because they refer specifically to Heartland. I don't think there is anything wrong with going after the higher end of the loan risk spectrum if you charge a consummately higher margin to deal with the risk of loan failure. From the look of the bank dashboard, that is exactly what Heartland are doing. Furthermore if your bad debts are better covered by higher profits from other risky loans in the same class, perhaps there is less need for a hefty capital base to back things up as loans go bad? The answer to the 'shortage of capital' conundrum that sees Heartland at the bottom of the 'capital adequacy' chart at 12.9% (31st March 2020 figure)? We HGH shareholders have to remember that the actual capital position of our company may be a lot worse than this, because that chart only covers Heartland Bank, and excludes the lightly capitalised 'Heartland Australia' business unit. I remain braced for a capital raising at Heartland should Jeff deem it desirable, even if I don't believe he needs to do it..

I thought the dashboard position on credit concentration was particularly interesting. That shows by spread of loans, Heartland is far less risky that ANZ, Westpac and BNZ. Is it because those three go after big corporate clients whereas Heartland does not? I pay some attention to bank credit ratings. But I note at the top of that dashboard page that 'Moodys', which does not rate Heartland, gives all the NZ banks they do rate the same credit rating of A1. And that includes some NZ registered banks that I have never heard of including the 'Bank of China', the 'China Construction Bank', and the 'Industrial and Commercial Bank of China'. 'Fitch', who do rate Heartland, give 'Kiwibank' their highest credit rating, even above ANZ, Westpac ASB and BNZ. Yet S&P Global put Kiwibank two notches below these four. I do wonder how seriously I should take these agency judged credit ratings sometimes!

Moving on to 'core funding', the bank funding from 'stable sources', it is pleasing to see Heartland at 92.7, well clear of the 75% Reserve Bank hurdle, but also well clear of the big four banks as well. Is that the magic of Heartland's high interest call account? Westpac is the worst in this regard on a score of 82.2, albeit still above the 75 hurdle. We know that Heartland has contracted out all of their banking services to Westpac to the extent that Heartland Bank accounts are Westpac bank accounts, but under a Heartland brand. I wonder how the core funding figure of Westpac would look with the Heartland accounts removed?

I think Heartland comes out of the dashboard comparison very well, even if we shareholders know that Heartland 'Bank' are really a finance company with a bank badge stuck on for marketing purposes. Can I say that now that Percy is no longer on the Heartland share register?

SNOOPY