HGH - Heartland Group Holdings

[noodles]

So much knowledge. It is clear you think Hnz is worth following. What would make you become a shareholder?

[percy]

I think noodles clarified his specific overhang of concern. But you are right Winner. If you look back far enough, there are more overhangs to consider.

Pyne Gould Corporation (PGC) used to control their rural arm Pyne Gould Guinness. Pyne Gould Guinness merged with Wrightsons to form PGG Wrightson, and the controlling 50% stake dropped to about 25%. Then Alan Lai and Agria came on board in two stages, leaving what was a strategic controlling stake in PGG to become an overhang of 12.5% in the new combined PGW. Except it wasn't an overhang because PGC were going to morph into a rural investment entity with the PGW stake just being the opening gambit. Until plans changed and George Kerr decided that investing in motorway service stops in the UK offered steadier future cashflows. The NZ currency appreciation and cessation of dividends from the UK then put paid to Kerr's UK expansion.

While this was happening the GFC came along and put the skids under PGC's Marac and other financial deals involving property. So the banks demanded PGC recapitalise, and the 'good bit' became Heartland. But then Heartland decided their difficult loans would be better handled in house after all, so bought those back off PGC. Somewhere in all that recapitalisation PGC had to sell both of their remaining stakes in HNZ and PGW at rock bottom prices. Meanwhile during the formation of Heartland, PGW wanted out of their "in house" finance division, but in a completely unrelated transaction (insert Tui billboard here) decided to pick up a small 3% share of HNZ who bought it, just to make sure they really did have enough money to operate properly. It was this 'significant' PGW stake in HNZ that was most recently sold off.

None of the entities mentioned so far have been flush of cash since the GFC. From my perspective there was a lot of passing the cash parcel around to get PGW, PGC, HNZ and Agria through their worst times. When companies go through these kind of restructurings, I don't know how those who come in late do for clarity. In some ways these situations might have been better resolved if a new company division had been set up specifically to rip small shareholders off. That would at least have put everything out in the open.

SNOOPY

Your time line is incorrect,and your "facts" are wrong.
PGC were never going to morph into a rural investment entity.In fact the board of PGC were talking of selling the the PGW holding.
GK was investing in Epic [Thames Water and Moto] long before he became involved in the recap of PGC.

[percy]

So much knowledge. It is clear you think Hnz is worth following. What would make you become a shareholder?

Knowledge??? Yeah right.! lol.

[Snoopy]

So much knowledge. It is clear you think Hnz is worth following. What would make you become a shareholder?

Snoopy an HNZ shareholder? For that to happen, I would have to assure myself of the quality of the assets that are underpinning HNZs equity. I want to understand how much of the troublesome assets are already provisioned for and how much of the equity base is still vulnerable to erosion of value by further loan write-downs.

Contrary to what some assume here, I am happy with the business model that HNZ has and the niches where management are pushing to expand. I think they are good operators. But having a tidy front desk, with nice flowers on display for the punters, season after season, does not guarantee that all is in order in the back office.

Finally I would look at how HNZ stacks up against other NZX listed companies that are occupying finance niches. Motor vehicle finance is very lucrative (ask Percy). In relative proportional terms, the likes of TUA are better capitalised. The market is not dumb and knows this which is why TUA is more expensive (comparing share price to NTA) than HNZ (because TUA doesn't carry the potential downside risks of HNZ). But which is the better investment at today's prices is another question entirely.

SNOOPY

discl: hold TUA

[Snoopy]

Snoopy an HNZ shareholder? For that to happen, I would have to assure myself of the quality of the assets that are underpinning HNZs equity. I want to understand how much of the troublesome assets are already provisioned for and how much of the equity base is still vulnerable to erosion of value by further loan write-downs.

I have only obtained a hard copy of the HNZ 2013 annual report in the last month. It is far easier to cross reference between pages (and believe me you have to do this) than on the pdf version. So here is a summary of where I am to date, for those who want something to chew over in the new year.

1/ The statement of financial position p24 shows that HNZ's largest asset is 'Finance Receivables'. You have to go to note 37 to find out what is really going on here. The total listed on p24 matches the total on the bottom RH corner of table 37d.

2/The on the book receivables assets are split into a 'judgement portfolio', where loans are graded on a scale 1 to 9 and a 'behavioural portfolio' where loans are graded according to how far they are in arrears, and where the bank is at recovering those loans that are in arrears. Some of these potentially troublesome loans have been provisioned against already by Heartland.

3/ As at 30th June 2013, the provision for collectively impaired assets was $15.961m. If I interpret note 37e correctly, this "collective provision" relates entirely to Grade 7 (Substandard) and Grade 8 (doubtful) loans, which collectively add up to nearly $40m of loans. Loans of Grade 9 (At risk of loss) are meant to be individually assessed for impairment. But despite Grade 9 loans being the most risky I can't find any provision for those in the accounts at all. Perhaps this is because applying a rule of thumb to individual troublesome assets doesn't really work. But my best reading of these notes is that $27.761m of Grade 9 loans are sitting on the books unprovided for. This is a potential write down per share of 7.1c.

4/ Also unprovided for is the largest category of loans needing attention, the grade 6 loans valued at $198.370m. These apparently have strong security and are typically rural exposures. But rural land value doesn't always go up. And with the NZ dollar set to rise further, I don't believe that rural land prices will rise in 2014. I have to take Heartland's word that their capital is not at risk with these farm loans. But if they have to tip farmers off their land to recover these debts, their credibility as a rural lender will be shot, even if shareholder funds are recovered.

5/ The biggest problem I have with the Grade 6 to Grade 9 loans is that when you add them all up for FY2013 I get $265.683m. Do the same for FY2012 and I get $268.242m, barely different. So this tells me that the 'management' of difficult debts has been accomplished by shuffling the same debt into different shoeboxes. In times of very low interest rates, I feel Heartland should have done better. And if they haven't sorted out their 'Monitor Plus' (Grade 6 to 9) loan portfolio now, how will they achieve it when interest rates start rising again?

SNOOPY

[Master98]

I have only obtained a hard copy of the HNZ 2013 annual report in the last month. It is far easier to cross reference between pages (and believe me you have to do this) than on the pdf version. So here is a summary of where I am to date, for those who want something to chew over in the new year.

1/ The statement of financial position p24 shows that HNZ's largest asset is 'Finance Receivables'. You have to go to note 37 to find out what is really going on here. The total listed on p24 matches the total on the bottom RH corner of table 37d.

2/The on the book receivables assets are split into a 'judgement portfolio', where loans are graded on a scale 1 to 9 and a 'behavioural portfolio' where loans are graded according to how far they are in arrears, and where the bank is at recovering those loans that are in arrears. Some of these potentially troublesome loans have been provisioned against already by Heartland.

3/ As at 30th June 2013, the provision for collectively impaired assets was $15.961m. If I interpret note 37e correctly, this "collective provision" relates entirely to Grade 7 (Substandard) and Grade 8 (doubtful) loans, which collectively add up to nearly $40m of loans. Loans of Grade 9 (At risk of loss) are meant to be individually assessed for impairment. But despite Grade 9 loans being the most risky I can't find any provision for those in the accounts at all. Perhaps this is because applying a rule of thumb to individual troublesome assets doesn't really work. But my best reading of these notes is that $27.761m of Grade 9 loans are sitting on the books unprovided for. This is a potential write down per share of 7.1c.

4/ Also unprovided for is the largest category of loans needing attention, the grade 6 loans valued at $198.370m. These apparently have strong security and are typically rural exposures. But rural land value doesn't always go up. And with the NZ dollar set to rise further, I don't believe that rural land prices will rise in 2014. I have to take Heartland's word that their capital is not at risk with these farm loans. But if they have to tip farmers off their land to recover these debts, their credibility as a rural lender will be shot, even if shareholder funds are recovered.

5/ The biggest problem I have with the Grade 6 to Grade 9 loans is that when you add them all up for FY2013 I get $265.683m. Do the same for FY2012 and I get $268.242m, barely different. So this tells me that the 'management' of difficult debts has been accomplished by shuffling the same debt into different shoeboxes. In times of very low interest rates, I feel Heartland should have done better. And if they haven't sorted out their 'Monitor Plus' (Grade 6 to 9) loan portfolio now, how will they achieve it when interest rates start rising again?

SNOOPY

Since i sold my HNZ shares still sit on side line waiting for entry point, you snoopy supply me more deeper analysis than any other poster, well done snoopy!

[Snoopy]

Since i sold my HNZ shares still sit on side line waiting for entry point, you snoopy supply me more deeper analysis than any other poster, well done snoopy!

Glad you have had some financial benefit from my posts on HNZ Master. I just post the facts as I see them on HNZ (not always correctly as other posters have pointed out) and if that overall helps others to decide for themselves whether they want to be in or out of HNZ, well that is fine by me.

Personally I am still positive on HNZ, although not positive enough to own any shares. The problem with most bank shares is that it is all very easy to pick with hindsight. Those who bought in between 50-60c have done very well, albeit with some risk along the way that having 'succeeded' they are now oblivious to.

I guess by the time I decide that HNZ is worth investing in myself, the price may already have bolted. But I don't see any compelling value at 85c, with the credit rating only barely investment grade. Mind you I could say the same about a lot of shares on the NZX.

SNOOPY

[Snow Leopard]

Happy New Year Snoopy.

Don't bang Your Head against that Hard Copy for too long.

Best Wishes
Paper Tiger

[percy]

Happy New Year Snoopy.

Don't bang Your Head against that Hard Copy for too long.

Best Wishes
Paper Tiger

Paper Tiger another classic.!!! lol.

[percy]

Risk is a reflection of price as well as metrics within the balance sheet. Was buying Heartland at 50c more or less risky than buying Heartland at today's prices?

I would suggest Percy was being greedy while others were being fearful, in a beautiful Buffett kind of way.

Or that he didn't let paralysis through analysis take over his thinking.

Sparky The Clown.
Love that phrase "paralysis through analysis."
Being a rather simple sort of fellow I find if your simplify things, you can see the wood from the trees.
HNZ directors said what they were going to do,how they were going to do it,and the result, is they are doing it.
At the AGM they said where HNZ was,where it was going and how they were going to achieve it.
Profit forecast to be $34mil to $37mil for the year ended 30/6/2014,and that they intend growing the business through acquisition/s.They stated the equity ratio is high and they have very strong equity.
As they achieve more "runs on the board" the risk reduces.