HGH - Heartland Group Holdings

[Snoopy]

Just to add to this, the half year result disclosure does not contain all the detail of full year report, as regards the risk analysis on outstanding loans. So I do not expect it to be all that useful in seeing how Heartland is progressing with their problem loans. However, one figure that we can check out will be the 'Investment Properties' as listed on the balance sheet. We know that Heartland are ahead of their own schedule in selling down these problem loans. But have the loans sold down come from here, or have they come from the regular loans outstanding? And have the loans been wound up at a profit or a loss? Those questions at least should be answered.

I wrote the above on 7th February. Now looking at the 31st December balance sheet and in particular the heading 'investment properties'.

December 2012: $55.316m
June 2013: $58.217m
December 2013: $61.481m ( +11.1% on pcp )

That means the value of 'problem' investment properties on the balance sheet is in fact going up, and has been doing so consistently since last June.

That fact is at odds with the declared statement by Heartland:

"Heartland continues to significantly reduce its non-core property holdings"

Total Property Book

30th June 2013 - $122.3m
31 December 2013 - $99.2m

The difference in the declared gross values of the property book is because Heartland's problem property book is split between those 'investment properties' and reduced grade regular loans. The half year report does not give shareholders the detail of what is happening to the latter. But if shifting loans from problem regular loans to 'investment properties' is part of the debt reduction process that is going on, I find that distinctly uninspirational.

Looking at note 12, the provision for individually impaired assets was $5.131m, up from $3.611m in the pcp. This is an indicator that increasing losses are probably being incurred as the problem properties are (supposedly?) being wound down.

SNOOPY

[Snow Leopard]

Snoopy - I find your interpretation of the half year accounts very imaginative.

Best Wishes
Paper Tiger

[Snoopy]

The underlying debt of the company according to the full year statement of financial position is: $33.673m+ $2.859m = $36.532m

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:

$2,504.627m - ($2,010.376m +$58.287m + $165.223m) = $270.741m

We are then asked to remove the intangible assets from the equation as well:

$270.741m - $22.963m = $247.778m

Now we have the information needed to calculate the underlying company debt net of all their lending activities:

$36.532m/$247.778m= 14.7% < 90%

Result: PASS TEST

The position has improved significantly over the last year. Looks like the debt position has not worsened during the year because of all the deferred branch transformation expenditure that was shunted into the FY2013 year as I feared.

An update from the previous reporting period, FY2013.

The underlying debt of the company according to the HY2014 statement of financial position is: $32.612m

To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:

$2,492.090m - ($1,905.850m +$61.481m + $255.427m) = $269.332m

We are then asked to remove the intangible assets from the equation as well:

$269.332m - $22.891m = $246.441m

Now we have the information needed to calculate the underlying company debt net of all their lending activities:

$32.612m/$246.441m= 13.2% < 90%

Result: PASS TEST

This means the position has improved usefully over the latest half year.

SNOOPY

[Snoopy]

Results are out so time to have another look at those Heartland banking covenants.

Updating for the full year result FY2013. The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $206.349m-$70.347m= $136.002m

Interest expense is listed as $110.895m.

So (EBIT)/(Interest Expense)= ($136.002)/($110.895)= 1.22 > 1.20

Result: PASS TEST, a significant improvement from the FY2012 position.

Results are out for HY2014 so time to update.

Updating for the half year result HY2014. The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs

EBIT (high estimate) = $100.500m-$32.417m= $68.083m

Interest expense is listed as $48.114m.

So (EBIT)/(Interest Expense)= ($68.083)/($48.114)= 1.42 > 1.20

Result: PASS TEST, a significant improvement from the FY2013 position. Perhaps that drop in interest being paid to debenture holders as a result of becoming a bank is starting to come through?

SNOOPY

[Snoopy]

Updating this number for the full year

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland FY2013

= $370.542m/$2504.627m = 14.6%

This is a significant deterioration on the FY2012 position. Not surprising as borrowings from debenture customers have increased, which results in a larger total asset position and dividend payments have weakened the balance sheet by shrinking equity. Unfortunately I believe that if HNZ is going to grow as they proclaim, they simply can't do it by shrinking their share capital base.

Updating this number for the half year HY2014

Equity Ratio = (Total Equity)/(Total Assets)

Using numbers from the Heartland FY2013

= $382.510m/$2492.090m = 15.3%

This is an improvement on the FY2013 position. It does not include any effect from the just announced reverse mortgage acquisitions. Nevertheless the underlying loan book continues to shrink away, albeit by a miniscule 0.5%.

SNOOPY

[noodles]

Nevertheless the underlying loan book continues to shrink away, albeit by a miniscule 0.5%.

The shrinking loan book is due to their exit from the unprofitable residential mortgages from the former building societies. Until this trend stops, I think it is a but pointless focusing on the loan book size. What is important is the Net Operating Income. This increased 13%.

[Snoopy]

The shrinking loan book is due to their exit from the unprofitable residential mortgages from the former building societies. Until this trend stops, I think it is a but pointless focusing on the loan book size. What is important is the Net Operating Income. This increased 13%.

I agree with you Noodles that the long term profitability of the loan portfolio is more important than maintaining the size of the loan book at any cost.

One thing that has surprised me though is the reduction in size of the rural loan portfolio. This has fallen over the past calendar year from $481m to $416m, a fall of 13.5%. By contrast the fall in 'Retail and Consumer' (including residential mortgages) has been from $946m to $906m a fall of 4.2%.

In both gross terms and percentage terms, the biggest 'shrinkage' in Heartland's loan portfolio is on the rural loan book. Proof that the real 'Heartland' of New Zealand is actually Auckland?

SNOOPY

[Harvey Specter]

Result: PASS TEST

Result: PASS TEST,

This is an improvement on the FY2013 position.

Is Snoopy becoming a belieber? When will he rate this a buy.

[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.!!

Good point Percy. Yes Heartland could use their retained earnings to boost their loan book by far more than just their new retained capital. And $10m in retained earnings from capital could indeed allow the reverse mortgage loan book to expand by $90m. But Heartland are going to have to choose where they deploy any new retained earnings. And of course they can't boost dividends and boost retained earnings with a static earnings per share outlook. Shareholders can benefit from one or the other, but not both.

SNOOPY

[Harvey Specter]

Shareholders can benefit from one or the other, but not both.

That's what the DRiP is for. Allows those that want the income to have it, but those that dont, to reinvest for growth. Not quite both, but a half way house.