HGH - Heartland Group Holdings

[Beagle]

I am also pleased with the dividend reinvestment plan price.
At the mid point of HGH's FY21 forecast $84m this gives 14.4 cps earnings.
The average FY21 PE ratio of the six Aussie banks I follow is currently 12.6.
The other hound has expended vast amounts of energy with his comprehensive analysis and good on him.
I am going to simply run with the company's own estimate of 14.4 cps and accept the average forward PE ratio of the 6 Aussie banks I follow as being a reasonable proxy for fair value that currently encompasses all known and expected risks and opportunities.

I therefore have a price target of 14.4 cps x 12.6 = $1.81 for HGH. Obviously there are real risks around how long Covid persists and the depth of the recession in N.Z. however that's already priced in with that low PE in my view as I know HGH has previously had a normal PE range within business cycles of 11 -17.5.

HGH looks very good value to me but I think that about all the stocks I own lol

Disc: I bought more today.

[King1212]

Dang master...I wish I have more fund like u!!

[Snoopy]

The other hound has expended vast amounts of energy with his comprehensive analysis and good on him.
I am going to simply run with the company's own estimate of 14.4 cps and accept the average forward PE ratio of the 6 Aussie banks I follow as being a reasonable proxy for fair value that currently encompasses all known and expected risks and opportunities.

Just in case others were wondering why I spent 'vast amounts of energy' getting the same figure as Jeff who told shareholders what next years earnings expectation is. The point was not the answer (although it is nice to know I am on the same page as Jeff). The point is to know what drives the answer. So that 'when stuff happens' (and I think Covid-19 has some more surprises to deliver yet) I will know how to react when the news comes along, by being able to discern what news is just 'shock value' and what news will have a 'real ongoing effect' of HGH going forwards.

SNOOPY

[freddagg]

Was over 2 bucks once ......and was making less than it is now

Didnt someone once mention that they sold at $2.14

[Baa_Baa]

Didnt someone once mention that they sold at $2.14

That was pretty bloody clever with hindsight wasn’t it, unlike some who have held and plumbed the depths. Oh well, hopefully we’re on the way to recovery. This is my dog, if it wasn’t for the dividends it would be under water. I hate sideways shares as much as losers. Kicking myself for not having the fortitude to quit this pig dog when it broadcast capital losses.

[Beagle]

Didnt someone once mention that they sold at $2.14

I couldn't possibly comment lol

Next time we get there it will be on much stronger fundamental's.

[Waltzing]

We were considering holding but in april we move it into ARG for a profit...Now ARG doesnt have the same growth potential but who says we have seen the end of winter...

[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
FY2020	6.5cps + 4.5cps
Average FY2016 to FY2020 inclusive	9.00cps

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. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.

Updating my dividend record for the about to be received final dividend payment from FY2020 earnings, paid in FY2021.

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 + 4.5cps	2nd April: RBNZ Covid-19 Package suspends NZ bank dividends to shareholders
FY2021	2.5cps + ?.?cps
Average FY2016.5 to FY2020.5 inclusive	8.70cps

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. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.

SNOOPY

[Beagle]

We were considering holding but in april we move it into ARG for a profit...Now ARG doesnt have the same growth potential but who says we have seen the end of winter...

ARG is a good hold for yield, (and I hold some) but my view is that HGH has the better potential Covid look through recovery return. On a full Covid recovery this could be earning 17 cps in 2-3 years time and put a mid point of its historical PE range (say 14) on that and in due course we could see PE14 x 17eps = $2.38. It has traded on a historical PE of as much as 17 before. Ask me how I know

Having a few dollars in each of these two isn't a silly move at all.

[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 )

9.0c / (0.72 x 0.075) = $1.67

A reminder here that NTA was

($687.600m - $72.159m) / 577.468m = $1.07 cps

at the half year FY2020 balance date. This means my 'fair valuation' is at a good premium (+56%) to net tangible asset value.

This $1.67 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 share price range for HGH of $1.34 to $2.00. $1.90, where the share is trading today, looks a ten cents or so above fair value. My target accumulation price (10% below fair value) is now $1.50. And yes I could add the upcoming 4.5c interim dividend onto that fair value.

When valuing a share, it usually pays to check out value from more than one perspective. This valuation considers what HGH might be worth from purely a dividend paying perspective.

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 )

8.7c / (0.72 x 0.075) = $1.61

A reminder here that NTA was

($699.980m - $72.813m) / 580.979m = $1.08 cps

at the full year FY2020 balance date. This means my 'fair valuation' is at a good premium (+49%) to net tangible asset value.

This $1.61 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 share price range for HGH of $1.29 to $1.93. $1.34, where the share is trading today, looks 27 cents or so below fair value. My target accumulation price (10% below fair value) is now $1.45. I should note here that if the permissions to pay bank dividends dividends are not fully restored by the RBNZ by the time the traditional dividend in March 2021 is paid, then the calculations in this post will have overvalued the HGH share.

SNOOPY