HGH - Heartland Group Holdings

[KJMLimited]

Shouldn't the write off be looked at in relation to the size of the book though? I can't see the whole article as I refuse to pay the NZH premium, but if anyone who has access and can therefore enlighten me on the size of the Harmoney book I'd be grateful.

[Snoopy]

https://www.nzherald.co.nz/personal-...ectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.

I see Harmoney have shifted their balance date from March to June (now the same as Heartland bank), which is why they are reporting over a 15 month period.

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.

Information on Harmoney's FY2020 result can be found here

https://www.interest.co.nz/news/1067...gging-consumer

Harmoney	Financial Year ending 31-03-2019	Financial Fifteen Months ending 30-06-2020
Impairment Expense (A)	$0.830m	$8.990m
Finance Receivables (B)	$367m	$129m
Heartland Share (13.1%) of Finance Receivables (1)	$48m	$17m
Impairment Expense to FR ratio (A)/(B)	0.23%	7.0%
Period Profit	$7.22m	-$15.4m
Heartland Share (13.1%) of Period Profit	$0.946m	-$2.02m x(12/15)
Heartland Shareholding & Lending Operational Profit (2)	$8.2m	$2.7m

Notes

(1) We don't know what portion of the loan book Heartland actually funds. i am just assuming they are funding an amount in proportion to their shareholding.

(2) Next we need to work out the return from the capital that Heartland has lent to Harmoney. If 7% of the loan book has gone bad then Heartland's share of this capital loss would be: 0.07 x $17m = $1.2m. However, they should have made a profit on the 93% of the loan book that did not go bad. The average size of the loan book over the period can be modelled as follows:

($48m +$17m )/2 = $32.5m

Subtract from this the $1.2m of bad debts as found at the end of the year and we get an averaged 'earning' loan balance of: $32.5m - $1.2m = $31.3m. This should provide earnings to Heartland of: 0.15 x $31.3m = $4.7m.

I estimate the overall profit for the year from Heartland's interest in Harmoney to be:

-$1.6m + $4.7m - $1.2m = $1.9m

In my most likely scenario in my three part scenario analysis I was expecting Harmoney to wind up by the end of FY2022. The way the loan book has shrunk would suggest it is winding down faster than I had thought. I was budgeting for a $7.2m loss in Heartland's share of the profit, courtesy of the decline of Harmoney, from FY2022 and it looks like we are getting near there in FY2020 (Down $8.2m - $1.9m = $6.3m)! Nevertheless it is all broadly consistent with my modelling. We still could get that recovery blip from here I was modelling for FY2021. So no change to my Heartland fair value target price of $1.18 on this news.

SNOOPY

[Cyclical]

Shouldn't the write off be looked at in relation to the size of the book though? I can't see the whole article as I refuse to pay the NZH premium, but if anyone who has access and can therefore enlighten me on the size of the Harmoney book I'd be grateful.

Yeah, I would have thought so. $1.7b I think I read, spread across 50k customers in NZ and OZ. In that context I dont find it too concerning, although could be the tip of the iceberg...

Edit - ignore me and run with Snoopy's figures. 1.7b is probably their total lending over the years they've been in business.

[Snow Leopard]

https://www.nzherald.co.nz/personal-...ectid=12360453

Hey Snoopy. Do HGH still own part of this ?

I think this gives a valuable insight that some need to see of what happens when you loan money unsecured to muppetts.

[winner69]

I take solace that Heartland took advantage of the waivers and didn’t have to pull their fingers out to get their reports out by end of August like most other businesses. Slack bastards eh


But at least it gives them plenty of time to play around with the numbers to come up with a good result ....within and maybe near the top of guidance. That’ll be good.

Hope the team have enjoyed being more relaxed about things this time round.

[Beagle]

Yes it will give them more time to play around with their bad and doubtful debt modelling programs...but I suspect there is no predictive model for how the effect of Covid will play out, (simply because we've never had anything even remotely like this before), in terms of bad and delinquent loans so the process will involve even more guesswork than normal which could be why they bought themselves more time to make the numbers up they want to give the best bonus result possible in the circumstances.

[winner69]

Yes it will give them more time to play around with their bad and doubtful debt modelling programs...but I suspect there is no predictive model for how the effect of Covid will play out, (simply because we've never had anything even remotely like this before), in terms of bad and delinquent loans so the process will involve even more guesswork than normal which could be why they bought themselves more time to make the numbers up they want to give the best bonus result possible in the circumstances.

Yes indeed

Proactive provisioning is an art form (not science or maths) and like most art creativity rules

Suppose the huge rainy day fund might take a bit of a hiding

I reckon whatever Jeff comes up with it will be so ‘artistic’ that even Snoops won’t be able to work it out.

[Beagle]

Yes indeed

Proactive provisioning is an art form (not science or maths) and like most art creativity rules

Suppose the huge rainy day fund might take a bit of a hiding

I reckon whatever Jeff comes up with it will be so ‘artistic’ that even Snoops won’t be able to work it out.

It sure it, a real art form and this year's special creativity is almost certain to be award winning. http://www.stuff.co.nz/entertainment...ubbish-artists

[winner69]

It sure it, a real art form and this year's special creativity is almost certain to be award winning. http://www.stuff.co.nz/entertainment...ubbish-artists

The ripped up paper I put on the worm farm is more artistic than that. Maybe I could enter next year with the worms included and call it live art

Most Annual Reports at the moment are rubbish

Amazes me some keep updating their spreadsheets with years of numbers in it and produce total meaningless historical CAGR %ages

[Beagle]

Don't know about most financials' being rubbish but banks and finance companies trying to model up future estimates of bad and doubtful debts on all existing loans when nobody has any idea how long Covid 19 will wreck havoc on the economy...and the effect on borrowers. Lets just say the other Beagle should stop wasting his time. We'll only know what bad debts really are once Covid is all over.