HGH - Heartland Group Holdings

[winner69]

Overdue for a peer group comparison. I think we all know the Australian banks are grappling with issues and don't need to regurgitate all of them.
FY20 forwards PE's
BEN 13.9 Comment a no growth bank with eps in FY17 and FY18 higher than either the forecast for FY20 or FY21 !
BOQ 12.7 - Comment - same as above
ANZ 12.2 Comment - Crikey do they have issues on both sides of the Tasman or what !...which probably explains their low PE
NAB 13.4
WBC 13.1
CBA 16.2
Australian sector average 13.6

How does HGH compare. Has been growing eps steadily but somewhat frustratingly more slowly in recent years. Mid point of FY20 forecast is 78.5m which gives forcast eps of 13.59 cos and a forward FY20 PE of just 12.2.

I think their generally better track record of eps growth, better capital ratio and better earnings prospects should accord them a PE at least the same as the sector average in Australia, 13.6 which could see a rerating to 13.6 x 13.59 = $1.85 in early 2020.

Gross yield assuming 10.5 cos in fully imputed annual dividends for FY20 is 10.5 / 0.72 = 14.583 / 166 = 8.8%.

I think eps growth in FY21 will be stronger than FY20. Disc 5.3% portfolio allocation.

From Airedale on another thread. If this guy that his Aussie banks overvalued by 16% then maybe HGH is priced about ...or only slightly over valued

Further thoughts: Colin Twiggs estimates that the major Australian banks are over on average over valued by 16.5%. Taking Friday's closing SP of Au $26.63 minus 16.5% =Au $ 26.19. That indicates that the SPP price of Au$ 25.32 is at $0.87 discount to fair value.

[Beagle]

From Airedale on another thread. If this guy that his Aussie banks overvalued by 16% then maybe HGH is priced about ...or only slightly over valued

I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.

[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 )

8.8c / (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.

I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.

1/ New car market slowing (the biggest cash cow for Heartland).
2/ Timing mismatch between duration of typical reverse mortgages (7-8 years) and capital borrowed to fund those mortgages (Seniors debt facility to expire in under two years).
3/ Reserve bank set to raise capital requirement for Heartland Group Holdings subsidiary 'Heartland Bank. Heartland may be less affected that other banks by this but it will still be affected.
4/ Prospect of the next recession ( how long can Adrian Orr hold it off?) hitting second tier finance companies hard.

These four observations strike me as significant negative factors that mean potential shareholders should think long and hard about increasing their exposure at Heartland at today's lofty market prices ( $1.67 ). I am not saying the share price won't go higher in the short or long term. I just think HGH (not a bank remember, because Heartland management don't want Reserve Bank scrutiny of Heartland's Australian operations) is trading a little above fair value right now.

After attending the AGM, I see no reason to revise my $1.63 fair valuation.

SNOOPY

[winner69]

I'll just reiterate from my experience that in the last 5 years HGH has traded in a forward PE range of 11 - 17.5, average 14.25 and is presently 12.2. Funny how things usually revert to the mean isn't it which indicates 14.25 / 12.2 HGH is presently ~ 17% undervalued. $1.67 x 1.17 = $1.95 as a perfectly reasonable price target for late 2020.

Just as well you have that 17.2 in your calcs ...but you know full well that really is an outlier ...only got that high on the outrageous share price of 214 when you sold out. Well done on that

ASB Report has the PE at announcement dates for the last five years as 11.3 (in 2015), 10.3, 14.4, 12.3 and 11.3 (2019). Average last five years PE being 11.9 and that includes the impact of that period of outrageous exhuberance.

Those are trailing EPS but let’s assume that in 2020 EPS is your 13.6 cents then a share price of $1.63 seems about it ...isn’t it amazing how things seem to revert to Snoopy’s numbers


So current $1.67 is a bloody good price

[Beagle]

Difficult to argue with that logic and I accept your numbers to a point. With interest rates at 100 year lows you could argue the risk free rate is 2% lower than normal so a 2 higher PE than normal is acceptable so I raise your average PE of 11.9 to 13.9 and on 13.6 cents you could make the case that $1.89 is fair and reasonable.

In support of my thesis is a peer group comparison at present showing Australian banks at an average of 13.6. and don't forget HGH is growing eps not shrinking or flatlining like most of its peers. Further, HGH faces none of the issues the Aussie banks do from the Royal commission of enquiry into Australian banking and appears through its DRIP to be in good shape to meet proposed RBNZ capital requirements, unless they come out with something truly radical.

Before you roll out the ol Aussie banks have always traded at higher PE's that's not the case either and neither is it presently the case for that old chestnut of PE's comparisons of QAN v AIR. I don't think HGH is a screaming buy, far from it, but accumulating on any weakness for those that don't already have their desired portfolio weighting looks logical.

[percy]

Another very positive agm .

HGH/HBL are currently trading well.
Also positive is HGH's capacity to "adjust" HBL's equity ratio "at will" to suit The Reserve Bank of NZ's capital requirements.

Posters should note the "at will" in the above statement.

[Beagle]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more

[janner]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more

percy and I have been so tolerant... Buy and hold.. Tell us ( just me ) we have been wrong,

[winner69]

Global Dairy Prices up again overnight

Generally a positive for the Heartland share price bearing in mind the relationship between the two.

Good value here - whatever that means

[RTM]

Added more of these yesterday at $1.68. 6.4% position now. My granddaughter sung me happy birthday in Te Reo on the weekend. I took that as a sign to try and be more tolerant of all this politically correct stuff and buy more

Care Beagle...you know what happens when you go over 5% !