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  1. #2771
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    Quote Originally Posted by Snoopy View Post
    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
    Again this is their strategy, rather than a drop off in business.

    "This decrease was driven by reductions in the receivables book acquired from PGG Wrightson Limited, in areas of either higher risk or overlapping competition with major banks. Heartland’s emphasis is mainly
    on livestock lending with the pipeline looking good for the next few months. Livestock lending
    continued to perform well, growing 10.6% over the 12 months ended 31 December 2013.
    "
    Last edited by noodles; 27-02-2014 at 08:59 AM.
    No advice here. Just banter. DYOR

  2. #2772
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    Default Heartland's Acceptable Operating Leverage Ratio

    Quote Originally Posted by Snoopy View Post
    Back to the acquisition.

    From page 29 of the February 2014 presentation:

    ----

    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%
    The above relates to the Reverse Mortgage acquisition. But we can also work backwards and see from a 'reserve bank' pair of eyes (wheels?) deduce what is considered an acceptable operating leverage ratio for the rest of the business.

    Apparently, just before the purchase of the reverse mortgages, Heartland had 'surplus' cash of $28.3m on the balance sheet. If we look at the 31st December 2013 HY2014 balance sheet $178.5m in cash was there. So we can deduce that:

    $178.5m - $28.3m = $150.2m

    of cash is required , as part of a more comprehensive asset package, to fund all the rest of the Heartland business. Put another way, the 'total equity' (again from the balance sheet) needed to fund the rest of the Heartland business is:

    $382.5m - $28.3m = $354.2m

    The size of the loan book at balance date was $2,077.0m

    So the equity to loan book ratio for the rest of the business, as judged acceptable under the watchful eye of Mr Wheeler, is:

    $354.2m/$2,077m = 17.0%

    SNOOPY
    Last edited by Snoopy; 27-02-2014 at 09:05 AM.
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  3. #2773
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    Quote Originally Posted by Harvey Specter View Post
    Is Snoopy becoming a belieber? When will he rate this a buy.
    Heartland has always been a buy, but only at the right price. The right price is the sticking point. As for becoming a belieber, don't expect me to place myself on You Tube doing some sort of celebratory belly dance when this happens!

    SNOOPY
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  4. #2774
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    Quote Originally Posted by Snoopy View Post
    Heartland has always been a buy, but only at the right price.
    Interesting - I always thought you were off the opinion that this was too risky. Having said that, any company is a buy at the right price provided it has a positive liquidation value.

    What do you consider the right price (a general range would be fine if you dont have a exact figure) as I think it would give some more insight to your detailed analysis.

  5. #2775
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    Jeff was on the radio yesterday and said the NZ economy isn't as strong as most make out ...good in pockets but not that good in other areas

    Also said heartland is in a low growth lending market at the moment

    http://www.radionz.co.nz/audio/player/2587034

    About 4.30 in

  6. #2776
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    Default Tier 1 and Tier 2 Lending covenants HY2014

    Quote Originally Posted by Snoopy View Post
    Once again there is no mention of Tier 1 or Tier 2 in the Heartland FY2013 report.

    The 'best case' scenario is that all loans are Tier 1. $2,097.553 of loans are outstanding. 20% of that figure is:

    0.2 x $2,097.553m = $419.5m

    Heartland has total equity of $370.5m which is well below the 20% of loan target no matter what the tier classification of the loans.

    Result: FAIL TEST
    Once again there is no mention of Tier 1 or Tier 2 in the Heartland HY2014 report.

    The 'best case' scenario is that all loans are Tier 1. $2,097.553m of loans are outstanding. 20% of that figure is:

    0.2 x $2,076.968m = $415.4m

    Heartland has total equity of $382.5m which is still below the 20% of loan target no matter what the tier classification of the loans.

    Result: FAIL TEST

    PS I do note that while other posters have protested at my 20% of equity to back up the loan measuring stick in the past, it is not too far away from the 17% which by implication is judged acceptable by management under the watchful eye of Reserve Bank chairman Graeme Wheeler. The reserve bank further qualifies their views that a company of Heartlands credit rating still has a 1 in 30 chance of going broke in any year. I prefer to think in business cycles and 30 years will contain around five of those. So you could restate the Reserve Bank's view as saying that HNZ has a one in five chance of going broke at the bottom of the business cycle. For me that investment risk is too high. So I am sticking to my 20% equity requirement, even if the Reserve Bank will settle for less.
    Last edited by Snoopy; 24-02-2016 at 02:50 PM.
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  7. #2777
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    Quote Originally Posted by Harvey Specter View Post
    Interesting - I always thought you were of the opinion that this was too risky. Having said that, any company is a buy at the right price provided it has a positive liquidation value.

    What do you consider the right price (a general range would be fine if you dont have a exact figure) as I think it would give some more insight to your detailed analysis.
    Personally I do think there are lower risk options out there in this general sector generating a similar return. That is why I am not a Heartland shareholder as of now. To get me on the share register would require.

    1/ A strengthening of the balance sheet. About $35m -$40m of new equity should cover this (that addresses the risk issue).
    2/ A dividend yield of some 7-8% (that addresses the return issue).

    SNOOPY

    PS Of course it would also have to stack up favourably with other comparable investments.
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  8. #2778
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    Quote Originally Posted by belgarion View Post
    Snoopy,

    In HNZ's case, I'd expect shareholders would be smart enough to support any small to medium shortfall in funds at the bottom of the cycle via a nicely priced rights issue. I think most of us would support it as we're been well treated ... well almost ... Grrr ... tiny public pools! This is how it should work imho. Nice tight ship churning out dividends and capital gains for 5 out of 7 years of the cycle with supportive shareholders covering them for the 2 out of 7 years when they need it.

    Would you disagree?
    Belg, when I said that Heartland had a one in five chance of going broke in any business downturn, according the Reserve bank credit ratings, I do not expect it to actually go bankrupt in such a situation. As you point out, supportive shareholders could be asked for more capital or a placement made to save the company in an extreme stress situation.

    What I believe is that any future heroic supportive shareholders are almost certain to demand a discount as the price of their heroism! While HNZ remains if not short of capital, at least wearing shorts with paper thin material making up the seat of those pants, why go overboard and invest heavily now? The alternative of being one of those "heroic supportive shareholders" sometime in the future seems so much more lucrative, er I mean heroic!

    SNOOPY
    Last edited by Snoopy; 27-02-2014 at 11:13 AM.
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  9. #2779
    percy
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    An equity ratio any financial insto would be proud of.Liquidity strong,supportive shareholders,and improving profits,will drive a better credit rating.
    A NZ bank supporting New Zealanders.
    Last edited by percy; 27-02-2014 at 11:26 AM.

  10. #2780
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    Quote Originally Posted by belgarion View Post
    LOL Snoopy, I've found being one of the "heroic supportive shareholders" generally works out quite well so long as one takes a longer term view. Both in terms of the discounted rights and the longer term success of the company.
    LOL sums up how I see it too.!!!

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