HGH - Heartland Group Holdings

[Absolute144]

Well, i don't know about how much the banks are actually supporting the farmers. I have a mortgage on a farm and i do believe the government dropped the OCR in part to provide mortgage relief for farmers. Now my mortgage is fully floating - but still, ANZ passed no cut onto me with the latest OCR drop a couple of months ago. They just wanted me to shift to a fixed rate for for less. Currently paying 6.15 %. Wonder what HBL rate is?

[stoploss]

Well, i don't know about how much the banks are actually supporting the farmers. I have a mortgage on a farm and i do believe the government dropped the OCR in part to provide mortgage relief for farmers. Now my mortgage is fully floating - but still, ANZ passed no cut onto me with the latest OCR drop a couple of months ago. They just wanted me to shift to a fixed rate for for less. Currently paying 6.15 %. Wonder what HBL rate is?

Not advice but one and 2 year money is around 4.15/4.25 % for residential mortgages . If the bank is offering you a fixed rate anywhere near there for commercial lending even if the RBNZ ( not govt ) drop interest rates by 1 % which is unlikely IMO . You would still have a better deal on a short term fixed rate , with options in a year or twos time , you could maybe even restructure with a mix of floating and different fixed terms .

[kiora]

Well, i don't know about how much the banks are actually supporting the farmers. I have a mortgage on a farm and i do believe the government dropped the OCR in part to provide mortgage relief for farmers. Now my mortgage is fully floating - but still, ANZ passed no cut onto me with the latest OCR drop a couple of months ago. They just wanted me to shift to a fixed rate for for less. Currently paying 6.15 %. Wonder what HBL rate is?

6.15% a rort !?What term?,D or S& B ?

[Absolute144]

Not advice but one and 2 year money is around 4.15/4.25 % for residential mortgages . If the bank is offering you a fixed rate anywhere near there for commercial lending even if the RBNZ ( not govt ) drop interest rates by 1 % which is unlikely IMO . You would still have a better deal on a short term fixed rate , with options in a year or twos time , you could maybe even restructure with a mix of floating and different fixed terms .

Thanks. I'll look into it.

[Snoopy]

HBL will get to 160 before ARV - a certainty

Be there around full year announcement time ..... unless there a massive rights issue at 110 or something

$400m to take over UDC? There are now 476m Heartland shares on issue. So a 1:2 cash issue at $1 would raise $238m. $200m for the takeover and $38m to bolster the bad debt buffer.

With such a large cash issue, I would be looking to pick up Heartland shares for about $1.05 by purchasing some of those cash issue rights on market. Needless to say $1.28 on the market today looks relatively unattractive to this potential investor.

SNOOPY

[Snoopy]

Time to update the Liquidity Buffer ratio, the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

FY2015 Loan Maturity (Financial Receivables)	Expected	Contracted	C/E
On Demand	$37.012m	$37.012m	100%
0-6 months	$503.452m	$664.557m	132%
6-12 months	$341.392m	$450.638m	132%

My table of expected depositor behaviour for FY2015 follows:

FY2015 Deposit Maturity (Financial Liabilities)	Expected	Contracted	E/C
On Demand	$22.450m	$748.332m	3.01%
0-6 months	$395.102m	$1213.450m	32.4%
6-12 months	$249.762m	$686.159m	36.4%

This is the most imprtant calculation that most nvestors in finance companies never do. I have rechristened it the 'Meads Test'. The Meads Test is way to find out if dear old Colin says a profitable finance company is 'solid as', whether that company will run out of cash when it comes time to repay your debenture. "Liquidity Buffer Ratio" sounds a bit pompous, so I will adopt the term 'Meads Test' in the future, as I think most investors will relate to that term better.

We are looking at the balance between monies borrowed and monies lent and matching up those maturity dates using a one year time horizon. The equation we are looking to satisfy is:

(Total Current Money to Draw On)/(Net Current Loans Outstanding) > 10%

Heartland provides a nice projection of forward cashflows in note 14 of IRFY2016. But these are contacted cashflows. In practice depositors roll over their Heartland debentures. And when customers repay a Heartland loan, they often take out another loan. So what we as investors need to concentrate on is the expected behaviour of those that take out loans from Heartland and those that loan money to Heartland. Expected behaviour is not written in stone. But we can make an educated guess at this by looking at what happened in prior periods where both 'contracated' behaviour and 'expected' behaviour was tabulated. "Adjustment factors" in the table below:

HY2016 Loan Maturity (Financial Receivables)	Contracted	CE Factor	Expected
On Demand	$31.879m	1.000	$31.879m
0-6 months	$618,779m	1.32	$816.778m
6-12 months	$277.017m	1.32	$345.662m

HY2016 Deposit Maturity (Financial Liabilities)	Contracted	CE Factor	Expected
On Demand	$728.056m	0.0301	$21.914m
0-6 months	$1,360.508m	0.324	$440.805m
6-12 months	$498.705m	0.364	$181.529m

Now I have generated the expected cashflow data over the ensuing twelve months, I can proceeed to make some 'Meads Test' calculations.

SNOOPY

[pierre]

The above I would suggest is code for 'capitalising interest payments'.



The above is code for. "We have assumed the dairy situation will improve, when rating our dairy loans".

SNOOPY

I didn't notice Jeff referring to a Code Book during our conversation, however your interpretation may well be right - or not.

I don't expect they will be writing off $52m in FY16. FY17 could be a different story though if the dairy market doesn't improve sufficiently. Definitely worth watching what happens in that arena and assessing the impact on HBL. The SP could well take a knock if the payout doesn't start tracking upwards or HBL start ramping up provisions for bad or doubtful debts.

However, the business appears to be going well in other areas so maybe there might be some trade-off and we see profit maintained (or thereabouts) but growth stall a little.

[Snoopy]

HNZ LENDINGS vs HNZ DEBENTURES

Customers owe HNZ 'Finance Receivables' of $2,862,070,000. There is no breakdown in note 11 of AR2015 as to what loans are current or longer terms. However, if we look at note 20, we can derive the expected maturity profile of total finance receivables due over the next twelve months.

	On Demand	0-6 Months	6-12 Months	Total
Expected Receivables Due	$37.012m	+ $877.215m	+ $594.842m	= $1,509.069m
less Expected Deposits for Repayment	$22.450m	+ $395.102m	+ $249.762m	= $667.314m
equals Net Expected Cash Into Business	$14.562m	$482.112m	$345.080m	$841.755m {B}

If more money is coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity. That now is the case here.

HNZ LENDINGS vs HNZ DEBENTURES

Customers owe HNZ 'Finance Receivables' (Lendings) of $2,928,601,000. If we look at note 14 of IFR2016, we can derive the expected maturity profile of total finance receivables due over the next twelve months. (This is what I did in part 1 of this calculation.) Adding the totals for the ensuing twelve months gives:

	On Demand	0-6 Months	6-12 Months	Total
Expected Receivables Due	$31.879m	+ $816.788m	+ $365.662m	= $1,214.329m
less Expected Deposits for Repayment	$21.914m	+ $440.821m	+ $181.893m	= $644.628m
equals Net Expected Cash Into Business	$9.965m	$375.967m	$183.769m	$569.701m {B}

If more money is expected coming in from customer loans being repaid, than is having to be repaid to the debenture holders, then this is a good thing for liquidity and debenture holders being repaid. That is the case here: good news for debenture holders.

It is important to note that this calculation is based on the loan book position at balance date. New loans taken out since balance date are not included. Neither are brand new customer debentures invested with Heartland since balance date. So these figures are not a forecast of what will happen. But they are are forecast of what will happen if all customer loan and deposit activity ceased at last balance date. This means the figures are best suited for comparing with previous periods, rather than being forecasts of what will happen in their own right.

SNOOPY

[Jantar]

.......

$260m in dairy loans on the books.

20% write off
= $52m
= no profit for FY2016
= no dividend going forwards?

Such a write off would not pose a threat to the ongoing operation of Heartland. But it would get rid of what Heartland call their 'excess capital' from the balance sheet!
........
SNOOPY

Snoopy, I normally value your analysis, but I do believe that this time your are being overly pessimistic. What you are effectively allowing for here is for almost every single dairy loan to fail.

I will admit to making a few assumptions and not going back through the annual report in detail, but I base this claim as follows.

Assumption 1: The average dairy loan is at an LVR of 20%. So that a $260M in loans is covered by $325 in farm values, or each $1m of loan is covered by $1.25 M of security.
Assumption 2: From Pierre's quote "He said that should a dairy farm have to revert to sheep and beef the value of the operation would be around 60% of its dairy value and that with their LVR's HBL would not be too badly impacted. He is comfortable with their current level of provisioning." This means that for each $1,000,000 of loan that defaults and is foreclosed, the amount recovered is 60% of $1.25M or $0.75M. That means that for every $1M defaulted the potential write off is $0.25M.

So for a write off of $52M that would mean $208 M of defaults, or 80% of all dairy farms that HBL have loans to.

Do you really think that 80% of Dairy farms will fail?

[Beagle]

FWIW the reserve bank said some time back that with four years of low dairy pay-outs banks could suffer up to a 14% loss on their loan book. Looks like 3 years is locked and loaded and there's no sign of even the faintest light at the end of the tunnel. Including downstream effects on other loans to affected industries my thinking is around 14% x $400m = $56m or 12 cents per share, spread over many years so the most likely effect is as a material handbrake on profit growth going forward. What if the dairy downturn lasts longer than 4 years and $4 kg is the new normal...that's the nightmare scenario and losses could significantly exceed the RB's assumptions if land values fall by more than half. Seeing as virtually all the other banks are significantly increasing their impairments investors might like to ask themselves why they think HBL will be immune to this fundamental change of the tide in this sector.
(Disc: Don't hold, not looking to buy cheaper, not to be considered professional advice or a recommendation and I am sure many holders will still consider the bank is well positioned).