HGH - Heartland Group Holdings

[zs_cecil]

Hi Snoopy, the "Heartland Bank" part of the business doesn't look good indeed based on your numbers. We would see a decreasing revenue plus decreasing margin for the banking business (mentioned by the management). The dividend from the banking business would be sliding too regardless of the dividend suspension ( I might be over pessimistic here :-) ). So, I think the PE assumption/calculation would slowly become out of reality because most of the earning growths are from the reverse-mortgage business. By looking at your numbers, I can see why the HGH board is complaining about the valuation of the company.

Here is one scenario I imagine :-)

Perhaps, HGH would want to take out its non-banking business entirely and list it in ASX. This would immediately make the dividend yield look fancier hence drive up the value.
In the meantime, they would leave the banking business in NZX. The banking business eventually becomes a real "boring" dividend-paying bank after its revenue/profit become stable after Covid-19.

[winner69]

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.

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech

Thus a PE of at least 20 as a bare minimum ....value about $3

[Snoopy]

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech
https://nz.trustpilot.com/review/spo.../spotcap.co.nz
Thus a PE of at least 20 as a bare minimum ....value about $3

Slashing your branch network, outsourcing your face to face customer interactions to Westpac and putting your banking functions on apps does not make you a 'fintech'. Heartland has certainly invested in Fintechs. "Spotcap', a web based loan provider, seems to be their most prominent investment.

The competitive advantage of 'Spotcap' seems to be a black box decision making algorithm that can sniff out business loan opportunities that conventional banks might turn down. But things have gone very quiet since the Covid-19 crash.

https://nz.trustpilot.com/review/spotcap.co.nz

After a series of glowing reviews, there are no comments about any 'Spotcap' loans being approved since the Covid-19 lock down. If you go to the 'spotcap.co.nz' website, it redirects to

https://business.nz.zip.co/?utm_medi...ign=logo_click

Now 'Zip' is the parent company of 'Spotcap'. So has 'Spotcap' and their 'exclusive super algorithm' been found wanting and now died? Has it just been rebranded as 'Zip', or has 'Spotcap' business been redirected to parent Zip? If no new loans have been approved since the Covid-19 lock down, what benefit does 'Spotcap' offer to Heartland shareholders going forwards?

Next we move to Heartland's 25% stake in invoice book loan company 'Fuelled', run by the mysterious Finn Tapio Sorsa out of Wellington.

https://www.dnb.com/business-directo...b83b285b1.html

It has twelve employees and turnover of $US2.03m. However, they were late with filing their paperwork with the companies office this year and the website, www.fuelled.co.nz, is down. So I am unclear if this business is still operating.

It looks to me as through the 'Fintech' coat of paint on the Heartland brand is looking a little thin.

SNOOPY

[winner69]

Thanks Snoops. Lot of research there

Sounds like Heartland get involved in a few dodgy things ....hope being dodgy isn't part of the Heartland DNA

[Snoopy]

Hi Snoopy, the "Heartland Bank" part of the business doesn't look good indeed based on your numbers. We would see a decreasing revenue plus decreasing margin for the banking business (mentioned by the management). The dividend from the banking business would be sliding too regardless of the dividend suspension ( I might be over pessimistic here :-) ).

The truth is everyone IMO, including management, are flying blind on the banking side of the business. All we know -so far- is that given a wage subsidy, many businesses that could have been in serious trouble were able to keep operating and paying their loans (or were allowed to compound their loan debt!). We also know that there is a banking culture of declaring 'compounded debt' not to be impaired. That could come back to bite later. I think doing business internationally will continue to be problematic. So a revival in small business in NZ, a key target group for Heartland's O4B loans, will likely be from a resurgence in NZers selling 'home branded jam' to each other. And I am talking about jam both in the literal and 'added value' sense. Ultimately though, there is only so much money kiwis can make selling jam to each other. While I hope my somewhat downbeat outlook on business loans is wrong, as an finance sector investor I feel that I should take a slightly gloomy outlook to what I see as the riskiest part of the Heartland loan book. I don't yet know whether my gloomy outlook on business loans is the true picture, and neither, I suspect, do Heartland management. But if the business case for Heartland stacks up, despite this gloom, then I have no problem putting more of my investment capital into Heartland. So far, IMO, the overall investment case for Heartland does still stack up.

So, I think the PE assumption/calculation would slowly become out of reality because most of the earning growths are from the reverse-mortgage business. By looking at your numbers, I can see why the HGH board is complaining about the valuation of the company.

Here is one scenario I imagine :-)

Perhaps, HGH would want to take out its non-banking business entirely and list it in ASX. This would immediately make the dividend yield look fancier hence drive up the value.
In the meantime, they would leave the banking business in NZX. The banking business eventually becomes a real "boring" dividend-paying bank after its revenue/profit become stable after Covid-19.

My somewhat rosy assessment of the Heartland Reverse Equity Mortgage business is based on:

1/ A good track record of growth in writing REM business.
2/ A modest overall market share position in REM with plenty of room to grow.
3/ Heartland being the leading provider in new REM business in Australasia. Indeed the former big bank competition is no longer taking on any new business.

I also noted that, as well as being fully imputed, the latest dividend of 2,5cps is also fully franked for Australian shareholders. That makes sense when you realise that HGH business outside of Heartland Bank is centered around growing reverse mortgages in Australia. So I agree with you Cecil. There could very well be a case for Heartland Group Holdings listing a 'not a bank' financial entity in Australia, specialising in REM loans.

SNOOPY

[percy]

Thanks Snoops. Lot of research there

Sounds like Heartland get involved in a few dodgy things ....hope being dodgy isn't part of the Heartland DNA

If so they have a long way to go to catch up with their Aussie counterparts..lol.

[Beagle]

You’ve got to stop doing this ‘relative to 6 aussie banks’ gig

You know Heartland isn’t really a bank but it’s a finance company ...and even a fintech

Thus a PE of at least 20 as a bare minimum ....value about $3

Love it. If we get a strong recovery out the other side of Covid I can foresee 18 cps in earnings in a few years...put a growth / recovery PE on that of say 15 and $2.70, (double your money from here) is certainly a possibility in a few years time.

Hey Percy, you back into these yet ?...oh and BTW oh my goodness...I can scarcely believe it myself... I bought a small stake in TRA today for yield. I must be unwell...better go and see the Vet lol

[percy]

Just what we would expect from a board whose members are substantial shareholders.It is called "the owners eye."

Disc.I am again a shareholder.[45% of what I used to hold].

Yes as per the above post I brought back in on 17th September.
My TRA money I spent on Unlisted SFF,so have not brought back in yet. It will happen but I don't know when.

[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.

Loan-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

Once again lots of numbers here. Now there are six years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:

1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position has strengthened considerably, only being bettered by FY2016. This signalled a likely reduction in Heartland's 'on call' account holder interest rates (a drop which has subsequently happened). Depositors looking to invest with Heartland for up to six months are likely to be similarly disappointed.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:

Heartland 'Direct Call' ($1 minimum)	1.60%
Co-Operative bank ($100,000 minimum)	0.75%
SBS bank ($100,000 minimum)	0.75%
TSB Horizon Savings ($1 minimum)	0.90%

Heartland's call rate has dropped from 2.75% to 1.6% over the year. Other comparable deposit takers have dropped their rates too, albeit not as much in percentage terms. This is exactly what I predicted last year, when more outsourcing of debt via Australian bond issues was mooted. Cash fund depositors may think they have taken a 'hit' already. With more alternative Australian bond issues confirmed to fund the Australian expansion, I predict Heartland's on call rate to be significantly lower again in twelve month's time.

Expected cashflow for the 0-6 months has turned right around with Heartland now expecting an avalanche of cash to come due. This indicates we can expect Heartland's rates offered for six month term deposits to be toward the bottom end of their comparative peer group.

Heartland ($1,000 minimum)	2.80%
Co-Operative bank ($5,000 minimum)	2.80%
SBS bank ($5,000 minimum)	2.80%
ANZ bank ($10,000 minimum)	2.80%

There seems to be a 'consensus at the bottom'. Maybe the other BBB rated banks are also suffering from an excess of short term 'term deposit money'? If you have just $1,000 to invest then Heartland is competitive. But more than that and you would have to look very closely at investing in those lesser tier banks. I have thrown ANZ , a AA- rated bank, in there and can confirm that BNZ, ASB, Westpac and Kiwibank also offer a 2.8% return on a $10,000 investment over six months. If you have that $10,000 to invest, and there is no interest premium price to be paid by loaning your money to a lower credit rated BBB rated bank, why do it? And if Heartland doesn't really want to attract short term deposit money anymore, what does that say for their lending outlook going forwards?

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 FY2020 is derived from note 23 in AR2020 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	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected	FY2018 Financial Receivables Maturity: Contracted/ Expected	FY2019 Financial Receivables Maturity: Contracted/ Expected	FY2020 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$84.154m / $84.154m	$57.040m / $57.040m	$49.588m / $49.588m	$80.584m / $80.584m	NM / ?
0-6 months	132%	$743.389m / $961.274m	$618.271m / $816.118m	$609.268m / $804.234m	$1,020.160m / $1,346.611m	NM / ?
6-12 months	132%	$484.420m / $639.962m	$521.215m / $688.004m	$469.632m / $619.914m	$646.123m / $852.882m	NM / ?

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

Deposit Maturity	Expected Behaviour Multiple	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected	FY2018 Financial Liabilities Maturity: Contracted/ Expected	FY2019 Financial Liabilities Maturity: Contracted/ Expected	FY2020 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$718.587m / $21.630m	$836.829m / $25.189m	$924.072m / $27.815m	$895.210m / $26.946m	$813.140m / $24.476m
0-6 months	32.4%	$892.944m / $289.314m	$1,191.957m / $386.194m	$1,345.316m / $435.882m	$1,531.594m / $496.236m	$1,466.046m / $474.999m
6-12 months	36.4%	$837.844m / $304.975m	$729.145m / $265.409m	$572.731m / $208.474m	$620.836m / $225.984m	$900.558m / $327.803m

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.

The problem is that -this year- we cannot do this, because Heartland has provided no information on the maturity profile of loans coming due in the FY2021 financial year. I contend that this means the information supplied on liquidity in this years financial report is a joke. Measuring liquidity is a complex exercise done by comparing expected (not contracted ) cash inflows from maturing receivables loans to expected (not contracted) cash outflows from repaying debenture holders. This I understand. But to provide no information at all on maturing receivables means that measuring liquidity on a short term (or any term) basis is actually impossible.

I am at a loss to explain what Heartland are trying to achieve by only disclosing one half of their liquidity story. I think the level of disclosure under Note 23 in the FY2020 accounts is woefully inadequate. When information is withheld that has historically been disclosed, it always begs the question, what are Heartland trying to hide?

I see that in Note 1 of the accounts Heartland says:

"The Group has responded to the pandemic by working with its customers to understand their needs and provide them with the financial support that best meets their requirements. To date, that support has included participating in industry wide measures (such as the mortgage deferrals programme and the provision of liquidity under the Business Finance Guarantee Scheme (BFGS) program), and implementing other measures such as temporary payment reduction or payment deferral arrangements for both business and consumer customers. The Group has also developed a product, Heartland Extend, which provides customers with flexible payment options."

The government's 'business finance guarantee scheme' is still, AFAIK, performing well below target because, even with the government guaranteeing 80% of a loan that goes bad, the bank still loses the unguaranteed 20%. Why has the bank not told shareholders what the 'temporary payment reductions' (that means deferred interest and/or capital repayments) or 'payment deferral arrangements' (changing the contractual repayment dates of loans) are? And isn't 'Heartland Extend' a way to keep what would normally be called a bad debt out of the bad debt totals? How can Heartland get away with not declaring the quantum of any of this stuff?

SNOOPY

[Beagle]

Yes as per the above post I brought back in on 17th September.
My TRA money I spent on Unlisted SFF,so have not brought back in yet. It will happen but I don't know when.

Good on ya mate.

I burst out of my kennel this morning with another buy order. With you and both Beagles leading the hunt what could possibly go wrong lol