HGH - Heartland Group Holdings

[percy]

Any form of borrowing has fish hooks.
The article did point out if you were to borrow $300,000 on a normal mortgage you're likely to shell out over $600,000 over 25 years
The option of borrowing from the children, appears to me to the right way to focus everyone's attention.

[winner69]

An interesting article in this morning's The Press, page B4 headed ,"Reverse mortgages have their place."
"Quite frankly there's not a lot of personal downside."
Good to see a well balanced informative article.

Was it one of those advertorial pieces or a genuine bit of financial reporting.

Hope Heartland are encouraging more media to do bits on this.

[percy]

Any form of borrowing has fish hooks.
The article did point out if you were to borrow $300,000 on a normal mortgage you're likely to shell out over $600,000 over 25 years
The option of borrowing from the children, appears to me to the right way to focus everyone's attention.

[winner69]

Winner, the equity transferred to get the HER business was $86.140m (note 40). Assuming an ROE of 10% that equates to an after tax profit increment of $8.614m.

The business was acquired on 1st April, so one quarter of that incremental gain is already in this years profit figure. So teh three quarters Heartland can expect in FY2015 amounts to

0.75 x $8.614 = $6.5m

On my normalised profit of $41m for FY2014 this means a profit of $47.5m for FY2015. So maybe a reduction in the interest margin explains the difference?

SNOOPY

Heartland say they made $700,000 (after paying $1.2m in acquisition costs) in the last quarter of F14'

So that $8m estimate yours seems about right.

[percy]

Was it one of those advertorial pieces or a genuine bit of financial reporting.

Hope Heartland are encouraging more media to do bits on this.

Not advertorial.
In Good Living section.
Written by Janine Starks ;financial Agony Aunt.
Janine Starks is a financial commentator with expertise in banking,personal finance and funds management.
I expect the same article would be in The Dominion,and will appear on www.stuff.co.nz site..

[winner69]

I think the heartland School Fee Finance offer is a neat idea

Might not be huge part of their business but in these days of ever increasing inequality anything that can help kids get ahead is great. And maybe those kids as well as Mum and Dad or Granddad and Grandma will be customers for life,

Like this bit -

Heartland Bank is committed to helping develop and educate the next generation of Kiwis – who will drive prosperity in New Zealand. We’re now pleased to introduce a new and flexible way of paying for school tuition fees – to help get your child or grandchild off to a great start in life.


Gives me the warm fuzzies

A Colin seems to be in charge of this. Best of luck mate.

[Snoopy]

The bad debt position of Heartland's problem property assets has evolved. I have prepared a graphic to show what has happened over the years, and how that relates to capital risk

Attachment 6228

Now to explain.

Each year (FY2012, FY2013 and FY2014) is represented by three columns. The column to the left (total height) represents Heartlands shareholder funds at the end of each financial year. The LH column is made up of three colours. The first section, in wavy blue pyjamas, is the minimum amount of capital Heartland needs to satisfy Reserve Bank requirements. The mauve and yellow sections on top of that represent the safety margin. This is the amount of capital in excess of reserve bank requirements. The yellow section, which on the original version of this graph I drew was part of the mauve section, represents net profits earned during the financial year, less dividends paid. The yellow part therefore represents retained earnings from normal operations.

The second column (orange) represents 'doubtful debts' as taken from the company's breakdown of asset quality. The third column (red) I have labelled 'difficult debts' and this one incorporates the 'doubtful debts' as well. I calculated this by starting with the doubtful debts and adding on the next categpry of debt (not quite bad enough to be doubtful).

The effect of all the doubful debts going bad can be seen by subtracting the height of column 2 from column 1. You can see that for all three years that if all of the doubtful debts went bad, it wouldn't affect Heartland that much. The capital buffer above minimum reserve bank standards is still largely intact. However, if all the 'difficult debts' went bad, then that is where things could get interesting.

Some more explanation.

A 'stress bridge' is meant to show what could happen if a bank is placed under extra stress. A bank will always have some loans that cause real concern. Indeed the impairment provisions in the accounts are there to allow for just such a contingency. But sometimes these accounting contingencies are not enough. Sure there are the annual adjustments to impairment to allow an annual 'stock take' of risk. But these do not cover every possible loan problem. This is why I have concluded that further risk assessment is warranted.

My own 'doubtful debt' extra stress provision for FY2014 is around $20m. I think even the most ardent of HNZ supporters would be prepared to concede that such a scenario could happen, even under normal business conditions. Such an extra provision might cause the share price to gravitate back towards NTA, as investors questioned managements own judgement in assessing risk. The dividend might be cut in half too. But I don't believe a provision like that would be fatal to the company.

The red 'difficult debt' scenario for FY2014 takes things to another scale. It is hard to believe that management, who have performed admirably to date, could be caught out in their provisioning to this extent. This scenario, I believe, would probably only happen with some large external shock,: interest rates suddenly rising 5 percentage points within a year, a foot and mouth disease outbreak, something like that. Some might argue that such a scenario is not worth considering becasue the likelihood of such an event is so rare. I would argue that it should be because the consequences are so dire, even if the probability of such an event is low.

The 'red' scenario for FY2014 would see a capital hole of $90m to be filled to meet minimum reserve bank requirements. Of course no bank would raise just the bare minimum of funds required. But $90m when a banks market capitalisation is $400m is very doable. Go back one year (FY2013) and the equivalent minimum amount of capital to be raised would have been $120m, based on a then market capitalisation of $270m and with 388.704m shares on issue. The share as at June 2013 was around 70c. Looking more at FY2013, a 1:2 rights issue at 60c could have raised:

0.5 x 388.705 x 60c = $117m

About the right number. Of course dividends would to be cancelled for a couple of years to allow the capital base to recover. My guess is the market price would have drifted back to 60c, or maybe as an alternative Heartland could have made a placement to get a new cornerstone shareholder? The details here are less important than the overview. That is, Heartland would have been in a lot more trouble last year than if a similar event had occurred this year.

Ok, let's cut to the chase. The risk profile of Heartland has IMO been greatly reduced over the last twelve months. Those who bought in earlier have had a certain amount of luck that against all expectations the property market has been very favourable and so helped Heartland out of their balance sheet pickle. Good on them as luck can often play more of a part in investment returns that most people believe. Those buying in at today's prices will pay more. But they are buying into a significantly derisked entity. For many, that higher entry price today is a price worth paying to be free of that 2013 'red scenario' risk.

SNOOPY

[Tevita]

Thank you. I needed reassurance on my largest portfolio investment. You deserve others paying a fee for your personal research.

[Beagle]

So Snoopy, now we're looking at a business that's been significantly de-risked lets have a look at how the historical PE for HNZ compares with some Aussie banks, (remember Aussie banks average interest margin is a lot lower).
Current price of HNZ 96 cents, ex divvy price 92.5 cents, lets use the latter seeing as they're ex in five minutes time so too speak. 92.5 / 9 = 2014 PE of 10.3

A quick look at some of the Aussie banks off Reuters data
Bank of Queensland ASX code BOQ Price $12.77 PE 18.56 Div yield 4.82%
Bendigo Bank ASX Code BEN Price $12.74 PE 14.53 Div Yield 5.02%
National Aust Bank ASX code NAB Price $34.88 PE 14.3
Westpac ASX Code WBC Price $34.86 PE 15.14
Suncorp Metway Price $14.85 PE 26

Now I know all of these are much bigger banks BUT is does make me wonder if there isn't room for a bit of PE expansion for HNZ as it continues to pile on the runs, reduce risk and continues to gain credibility.
As I said a while back I think a PE of about 11.5-12.0 seems about right given the size of the bank and its slightly higher risk profile so based on a conservative mid point estimate of 9.3 cps EPS for 2015, (the mid point of the company's own forecast), that would in theory lead to a SP of about $1.07 - $1.12 this time next year with more growth to come as the HEL business shifts into a higher gear in 2015/6.
My contention therefore is we will see approx. 19% SP gains in the ensuing 12 months along (110 / 92.5, current effective ex divvy price) plus with our 10.6% gross dividend yield I have an expectation of circa total return. 30%

People, please feel free to add more comparisons and their PE's to this list which is by no means intended to be an exhaustive attempt to compare Australasian bank's ratio's.

[winner69]

So Snoopy, now we're looking at a business that's been significantly de-risked lets have a look at how the historical PE for HNZ compares with some Aussie banks, (remember Aussie banks average interest margin is a lot lower).
Current price of HNZ 96 cents, ex divvy price 92.5 cents, lets use the latter seeing as they're ex in five minutes time so too speak. 92.5 / 9 = 2014 PE of 10.3

A quick look at some of the Aussie banks off Reuters data
Bank of Queensland ASX code BOQ Price $12.77 PE 18.56 Div yield 4.82%
Bendigo Bank ASX Code BEN Price $12.74 PE 14.53 Div Yield 5.02%
National Aust Bank ASX code NAB Price $34.88 PE 14.3
Westpac ASX Code WBC Price $34.86 PE 15.14
Suncorp Metway Price $14.85 PE 26

Now I know all of these are much bigger banks BUT is does make me wonder if there isn't room for a bit of PE expansion for HNZ as it continues to pile on the runs, reduce risk and continues to gain credibility.
As I said a while back I think a PE of about 11.5-12.0 seems about right given the size of the bank and its slightly higher risk profile so based on a conservative mid point estimate of 9.3 cps EPS for 2015, (the mid point of the company's own forecast), that would in theory lead to a SP of about $1.07 - $1.12 this time next year with more growth to come as the HEL business shifts into a higher gear in 2015/6.
My contention therefore is we will see approx. 19% SP gains in the ensuing 12 months along (110 / 92.5, current effective ex divvy price) plus with our 10.6% gross dividend yield I have an expectation of circa total return. 30%

People, please feel free to add more comparisons and their PE's to this list which is by no means intended to be an exhaustive attempt to compare Australasian bank's ratio's.

Like the logic

So after the upgrade and your standing ovation EPS should be 10.6 cents

PE of 12 and we have a shareprice of $1.30

Move on a year when forward looking guidance will be at least 14 cents (remember HER things in full stride) and heck that's $1.56 by Xmas next year. People tell me markets are forward looking.

All I expect them to do is push a bit harder.

And what were the divies again?

That's my investment strategy ....and hope not part of it