HGH - Heartland Group Holdings

[Snoopy]

Management are not silly and they will have made sure the latest acquisition has not upset Heartland Bank's creditworthiness with the Reserve Bank. So perhaps a little reverse engineering of the figures related to the purchase Sentinel New Zealand (Sentinel) and Australian Seniors Finance (ASF) businesses, with combined assets of approximately NZ$760m might give us a good over the shoulder look of what looks OK in the mind of a Reserve Banker.

Most of the relevant information is on page 27 of the February 2014 investor presentation:

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Acquisition price $87m
First full year NPAT from acquisition ~$8‐9m
Integration costs ~$2m (post tax)
HNZ forecast FY14 NPAT $34‐$37m
HNZ forecast FY15 NPAT (after acquisition costs and expenses associated with integration) $42‐44m

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I note that if you add the first full year NPAT of $8m to $9m from the acquisition onto the FY2014 NPAT of $34-$37m you get $42m to $43m. This is very close to the $42m-$44m that Heartland is forecasting for FY2015.

The date for the settlement of the purchase is 1st April 2014. That means that FY2014 will only carry 3 months of earnings from this acquisition. I do note that the Heartland forecast of a profit of $34m to $37m for FY2014 was made as early as 5th June 2013, well before the Home Equity Release Portfolio acquisition. So that means the Home Equity release business will contribute a net nothing to the Heartland FY2014 result (underlying quarterly earnings of $8m/4= $2m, less $2m integration costs, so it all adds up).

OK, so forecast for NPAT for FY2014 is unchanged by acquisition. Incremental earnings of new division fully account for profit growth expected in FY2015. That means net underlying growth in FY2015 for the existing Heartland business, as forecast by Heartland themselves is nothing at all.

SNOOPY

[noodles]

That means net underlying growth in FY2015 for the existing Heartland business, as forecast by Heartland themselves is nothing at all.

Snoopy, The Heartland FY15 forecast is qualified with the following statement...
"Heartland’s forecast for FY2015 is yet to be finalised and more detailed financials will be available sometime following settlement of the acquisition."

So it could mean that some underlying growth will be added.

noodles

[winner69]

Most of the relevant information is on page 27 of the February 2014 investor presentation:

------

Acquisition price $87m
First full year NPAT from acquisition ~$8‐9m
Integration costs ~$2m (post tax)
HNZ forecast FY14 NPAT $34‐$37m
HNZ forecast FY15 NPAT (after acquisition costs and expenses associated with integration) $42‐44m

-----

I note that if you add the first full year NPAT of $8m to $9m from the acquisition onto the FY2014 NPAT of $34-$37m you get $42m to $43m. This is very close to the $42m-$44m that Heartland is forecasting for FY2015.

The date for the settlement of the purchase is 1st April 2014. That means that FY2014 will only carry 3 months of earnings from this acquisition. I do note that the Heartland forecast of a profit of $34m to $37m for FY2014 was made as early as 5th June 2013, well before the Home Equity Release Portfolio acquisition. So that means the Home Equity release business will contribute a net nothing to the Heartland FY2014 result (underlying quarterly earnings of $8m/4= $2m, less $2m integration costs, so it all adds up).

OK, so forecast for NPAT for FY2014 is unchanged by acquisition. Incremental earnings of new division fully account for profit growth expected in FY2015. That means net underlying growth in FY2015 for the existing Heartland business, as forecast by Heartland themselves is nothing at all.

SNOOPY

That's how I read it the first time as well.

Didn't say anything cause everybody was excited and didn't want to get Percy thinking h should delete himself from Sharetrader (like packing a sad like Sparky)

Nothing at all is ZILCH Snoopy but maybe not as all bad as it seems.

Could be 2014 HNZ is 34m (lower end) and acquisition delivers 6m (8m less costs 2m) giving 40m .....meaning HNZ profit could be up 2m to 4m

Maybe a profit downgrade hidden in this - even though the Nuplex man says coming in at lower end of guidance is NOT A PROFIT DOWNGRADE

I think we both go to bottom of class again

[Snoopy]

Most of the relevant information is on page 27 of the February 2014 investor presentation:

------

Acquisition price $87m
First full year NPAT from acquisition ~$8‐9m
Integration costs ~$2m (post tax)
HNZ forecast FY14 NPAT $34‐$37m
HNZ forecast FY15 NPAT (after acquisition costs and expenses associated with integration) $42‐44m

Please forgive my foray into reflecting on the rest of Heartland into FY2015. Back to the acquisition.

From page 29 of the February 2014 presentation:

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The acquisition consideration of NZ$87m is being funded by Heartland:

• To the extent of NZ$48.3m in cash. Heartland is conducting a capital raising of $20m (via a Placement and SPP) to
partially fund the NZ$48.3m cash component and will fund the balance with existing balance sheet cash; and
• By issuing 43m shares to the vendor at a price of $0.90 each. All shares issued to the Vendor are subject to a minimum
12 month lock‐up escrow arrangement

Heartland has this morning successfully completed a NZ$15m equity placement.

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43m shares at 90c works out at $38.7m in share value. Add the $48.3m in 'cash' being paid to the seller and I get $87m, the acquisition consideration.

Heartland say they are funding the $28.3m cash component of their purchase over and above the $20m capital raising from existing cash (by definition surplus or the Reserve bank would not allow them to do it) on their balance sheet.

Now go back to page 14 of the February 2014 acquisition presentation. The portfolio size is listed as $NZ340m plus $A380m ($NZ420m at prevailing exchange rates). So the total in $NZ terms is around $760m.

The underlying capital used to support this acquisition is $NZ87m.

So the loan value to underlying capital ratio is $87m/$760m= 11.4%

Given that Heartland has undertaken to maintain capital at somewhere near this ratio anyway, and given that the rest of Heartland is by their own forecast not growing, where is the capital going to come from if they want to expand the reverse mortgage side of the business?

SNOOPY

[winner69]

Snoopy, The Heartland FY15 forecast is qualified with the following statement...
"Heartland’s forecast for FY2015 is yet to be finalised and more detailed financials will be available sometime following settlement of the acquisition."

So it could mean that some underlying growth will be added.

noodles

Why bother even come up with a guidance then?

Did say eps accretive so must be OK ... But on these numbers might add 0.1 cents to eps if you round upwards.

[percy]

I am not buying into this argument.!!
Forecasts over one year out are "pie in the sky" to me.
What I see is Marac,PGWFinance being joined by another substantial business,Sentinel.This purchase adds bulk to Heartland.
Two very strong parts of Heartland being joined by a third strong part.
Heartland just got a lot better.Good businesses [which these are] in growing sectors, will reward shareholders,this year,next year,and for years to come with increasing dividends.
Well done Heartland.Great acquisition.

[winner69]

And no doubt the 2014 numbers will include a part year for Sentinel so everything will all get mixed and people will analyse to death what grew and what contributed and what was one off or non-recurring and all that sort if crap.

The only number you can tie them down to is this EPS accretive promise.at least this takes into account the 60m new shares.

I give the benefit of the doubt and will assume they would have made $35.7m this year (no acquisition). That is 9.1 cents per share (not counting new shares the other day)

Anything less than this in 2015 (I'll forgive them fr 2014) means the EPS claim was rubbish.

But then again we will get into time weighted average number of shares to calculate EPS and that can hide a few sins anyway

Maybe just grin and bear it and don't worry about things. It'll all turn out OK

[winner69]

I am not buying into this argument.!!
Forecasts over one year out are "pie in the sky" to me.
What I see is Marac,PGWFinance being joined by another substantial business,Sentinel.This purchase adds bulk to Heartland.
Two very strong parts of Heartland being joined by a third strong part.
Heartland just got a lot better.Good businesses [which these are] in growing sectors, will reward shareholders,this year,next year,and for years to come with increasing dividends.
Well done Heartland.Great acquisition.

I hear what you saying Percy - there is more to the future than one years forecast eh

However with all due respect you have quoted the 34m to 37m forecast many times to remind us all what wonderful progress HNZ is making. That didn't seem "pie in the sky" to you

Never mind .....this time next year HNZ will be touting $55m for 2016. That be good news eh

[percy]

.

So the loan value to underlying capital ratio is $87m/$760m= 11.4%

Given that Heartland has undertaken to maintain capital at somewhere near this ratio anyway, and given that the rest of Heartland is by their own forecast not growing, where is the capital going to come from if they want to expand the reverse mortgage side of the business?

SNOOPY

So $10mil net profit will allow Sentinel to grow loan book by approx. $90mil.[which from memory is the amount they said they intended to grow the book by per year.]
As Heartland's net profit will be nearly four times this amount,they may decide to grow the loan book even more.!!

[Xerof]

Exactly, percy, exactly

Snoopdog, compounding retained earnings is a powerful leverage tool

you should always leave a couple of those dog biscuits in your foodbowl