HGH - Heartland Group Holdings

[janner]

Had a bit of a chuckle too.!!!..lol.

I am sure Snoopy did also..

[Beagle]

Snoopy

I think on a risk adjusted basis HBL is now a pretty reasonable hold but I think its pretty clear in the last two years shareholders have carried considerable risk, (whether they acknowledge it or not) and returns in that timeframe have been pretty modest. Maybe they get to $1.60 by Christmas 2017 ?, maybe not ? Dividend yield is pretty good though. Maybe the SP goes up in line with EPS from here, (I think the current PE is at full stretch) so on a 1 year view maybe a 10% capital gain and 8% gross divvy, possible 18% total shareholder return which isn't too shabby.

Risk has abated in my view. Prospective returns are reasonable relative to lower risk in my view so I've acquired a modest holding. I think HBL and the other banks got very lucky with the dairy recovery....proof that sweeping problems under the carpet sometimes works.

[winner69]

Risk has abated in my view. Prospective returns are reasonable relative to lower risk in my view so I've acquired a modest holding. I think HBL and the other banks got very lucky with the dairy recovery....proof that sweeping problems under the carpet sometimes works.

Welcome aboard

So hope is a good strategy

[Beagle]

Welcome aboard

So hope is a good strategy

Thanks and yes hope sometimes works.

[percy]

Thank you Chris Lee site for something I did not know;
Heartland Bank, via Heartland Seniors Finance, received "Best Reverse Mortgage" award in Australia for 2016.
Positive.

[Snoopy]

Scale is important for any business wanting to maintain a strong position in whatever market they operate in. If you don't have scale, you can carry on developing a business until the point that the 'big boys' notice you. If you continue to push ahead, those already dominating the market will act aggressively against you. This can severly limit any future growth and may end up being fatal for that part of the smaller expanding business. I am not saying that a small business can never match and get on equal terms with a bigger one. I am saying that when a small player starts to tread on the toes of a big player, then this introduces a significantly higher risk for those invested in the smaller player. if as an investor you can avoid such a risk, this is a good thing.

Heartland in their December 2016 presentation say that their mission statement is to:

"Pursue opportunities where they can provide innovative products in niche areas within the household, business and rural sectors, that are under-serviced by the major banks"

The Heartland mission statement is sensible, because the big four Aussie Banks are absolute gargantuans by Heartland standards. It wouldn't be too far of a stretch to say that to take on the big Aussie banks directly would be a suicide mission. But how secure is Heartland really in these market niches in which they choose to operate?

The specific target markets are listed below:

Millennials (People Reaching your Adulthood in the early 21st Century => Aged 25-35 today):

Provide a frictionless digital experience to the emerging millennial market, who value speed and ease.
e.g. Harmony joint venture, Motor Vehicle Loans, Online personal loans. Growing the consumer loan book has a lower ROE (because more capital is needed to support such loans) which needs to be balanced by a higher margin.

Current Gross Receivables: $844m, Average Loan Size $14k

Heartland vs Competitors (Motor Vehicle)
1/ Marac (Heartland Subsidiary): 12.95% to 19.95%: Finance and Insurance Loan Book $340m
2/ Motor Trade Finance: 13.75%: Finance Book $535m
3/ Turners Vehicle Finance 12.95%. Finance book $144m

Heartland vs Competitors (Consumer Peer to Peer)
1a/ Harmony (Heartland investment 10% equity): Loans from $1,000 to $35,000 (all unsecured). Interest rates depends on net assets, income and credit history. Loan Book Size : Up to $100m (approx)
2a/ Squirrel Money: target A and B grade borrowers (only approve 21% of land applications). Loans $3,000 to $30,000 (unsecured) OR $70,000 (secured). Interest rate - market base plus individual risk profile. Loan Book Size: $5m

Retired:

Provide a personalised service to the 65+ via reverse mortgages. This requires an accessible and friendly branch structure, as the retired like to be able to eyeball their bank manager. Nevertheless the information is there on line too. ( https://www.seniorsfinance.co.nz/ )
e.g. Seniors Finance (Australia and New Zealand). Growing the reverse mortgage business will result in higher ROE (lower Reserve Bank risk weighting for housing, less capital applied) but a more compressed margin.

Current Gross Receivables (NZ only): $374m, Average Loan Size (NZ Only) $94k

Heartland vs Competitors:
1/ Heartland Seniors current loan rate is 7.5%, compounding monthly, $10,000 minimum loan. 15% of house value available at age 60. 35% at age 80. 40% at age 85. maximum Loan amount $500,000
2/ SBS Bank ('Retirement Loan' floating rate of 6.74% (fixed rate no longer available). Total loan balance $61m (September 2013) Amount of loan offered from 5% of the value of your home at age 60, to 30% at age 80 (to a maximum of 50%).)
3/ ASB (closed down their HomePlus business to new customers on August 3rd 2015),

Small and Medium Enterprise:

To be a smart streamlined on-line lender in this neglected market, where 'big banks' prefer to deal with 'big companies.' Plant/Equipment and Working Capital Finance. The web portal for SMEs is https://openforbusiness.heartland.co.nz/

Current Gross Receivables: $942m, Average Loan Size $107k

Heartland vs Competitors:
1/ Heartland Business Funding rate 10%, Property and Business Services book: $405m
2/ ANZ Business Indicator rate 9.4% plus lending margin. Business and Property Services book: $14,275m
3/ ASB Business Lending fixed rate 10.15%. Property and Business Services: $7,439m
4/ Westpac Base rate of Interest + 'Customer margin.' (Indicative 13.95%) Property and Busines Services book: $2,284m


Rural:

Livestock Finance, Farm transition loans, Intermediate Finance with partner PGG Wrightson, Term loans to farmers in the sheep beef and dairy sectors whose debt needs are modest (my emphasis). The web portal for livestock loans is https://openforlivestock.co.nz. However farm equipment funding is only accessible by dealers. https://ofb.heartland.co.nz/ofadappl...application%2F

Current Gross Receivables: $619m, Average Loan Size $209k

Heartland vs Competitors:
1/ Heartland Livestock: 100% finance available (for sheep, cattle, deer) secured against livestock purchased (not other farm assets). On line approval up to $500,000.
2/ ANZ $19,787m on loan ( 32x larger than Heartland! ) Agri Current Account "7.60% + (Lending margin)"
3/ Westpac $8,432m, Base rate of Interest + 'Customer margin.' (Indicative 13.95%)
4/ BNZ $2,210m on loan (includes fishing and forestry) Farm First rate 9.2%, secured over farm OR stock OR farming assets


Conclusion: Yes (see neighbouring discussions for reasoning)

SNOOPY

PS Base borrowing rates for various lenders can be found here

http://www.interest.co.nz/print/69150

on a page that appears to be regularly updated.

[Snoopy]

Conclusion: Open (so far)

Posting this discussion before I make my conclusion.

Looking at Heartland's four target markets, my impression is that they are strong in two and not so strong in the other two.

Strong 1: Millennials

Of the specialised motor vehicle retailers, Heartland are on par 'size wise' with 'Motor Vehicle Finance' and 'Turners'. However both Turners and MTF (through affiliated dealers) also sell vehicles themselves. Heartland do not. So it looks to me like Heartland have an inherent distribution channel disadvantage in this market. From the pricing information I can find, Heartland are prepared to meet 'market best' loan rates of 12.95% for their best prospective customers. Heartland have a high interest margin with respect to other banks. But Heartland fail the bank 'duck' test. Their finance company competitors have even higher interest margins. From a market size perspective Heartland are in a strong position. But I am unclear how they can match the cost structures and convenience of the competition going forwards.

Peer to peer is obviously in its infancy. But by grabbing a 10% stake in the first moving and largest player (Harmoney), Heartland is in a good position to learn about this new market, then perhaps ramp up their presence later.

While I can see some competitive pressures going forwards, Heartland's strong position in the 'Millennials' market today is not open to question.

Strong 2: Retired

Apart from SBS, Heartland are the only game in town for those wanting a reverse mortgage in New Zealand. Being about six times the size of their only remaining competition (I couln't find any current estimate for SBSs presence in this market) , the market strength of Heartland in the 'Retired' market is unquestionable.

Weak 1: Small and Medium Enterprise

There is some ambiguity as to how this business category is treated in the 'concentration of funding' section in the various accounts of the 'Big Banks'. Often the cheapest source of funding for small business owners is to take out a mortgage against their homes. These 'home loans' would not appear on the bank books as 'business loans', even though this is exactly what they are. Home loans are of course the domain of the big banks. Heartland does not want to take on the big banks directly! For the purpose of this exercise then, I have chosen to look at the big bank's 'Business and Property Service' loan books. Even though these probably under-represent the SME loan book of the big banks, they all dwarf what Heartland is doing by at least a multiple. Heartland's main point of difference appears to be 'ease of access' (getting loans approved fast, on line) and a relatively cheap loan rate. If you are a relatively small player, you do need to be price competitive, and remember that Heartland has an interest margin better than the bigger banks. But my impression is that Heartland does not have a sustainable long term advantage in this market. They are a minnow player and if a price war did break out between the big banks they could easily be squashed.


Weak 2: Rural

Despite being known as a 'rural specialist lender', in gross terms, even the relative minnow of the big banks -BNZ- has a rural loan book four times larger. The BNZ also has a lower base interest rate than Heartland, and will make rural loans against livestock and equipment, not necessarily land holdings. Making rural loans against livestock and equipment was, I thought, a Heartland exclusive. But this is not so. Heartland took a risk this year financing their farmer customers through loans that a major bank might have called in. The resultant goodwill among farmer customers might come back to help Heartland in future years. A further good point is that Heartland has a good and well established marketing channel through PGG Wrightson (Heartland own PGG Wrightson Finance).
Neverthless the bare facts of the situation show that Heartland is a relatively small player in Rural Loans. Furthermore, the emboldened acknowledgement from my 'Buffet Point 1' post

(We make) "Term loans to farmers in the sheep beef and dairy sectors whose debt needs are modest (my emphasis)"

speaks volumes.

Bear in mind that this was written in December 2016, after the worst of the dairy crisis appeared to be over. Bear in mind that this comment was written in the climate of investors questioning Heartland's exposure to dairy sector loans some months earlier. Given this background, I can understand why Heartland made this comment. The problem I can see going forwards is that if Heartland only lend to farmers whose 'debt needs are modest', that is aiming for a collision course with the big bank lenders. I see the comment as an admission by Heartland that they really don't have any competitive underlying advantage in Rural Lending compared to the big banks. And that, to me, spells potential trouible for growing Heartland's rural lending book going forwards.

Conclusion

'On the one hand' BUT 'on the other hand'. Anyone got a comment to make to help stop me wavering? I think that am going to have to sleep on this!

SNOOPY

[kappa]

https://customers.microsoft.com/en-U.../heartlandbank

[percy]

https://customers.microsoft.com/en-U.../heartlandbank

Kappa.
Welcome to Share Trader.
Thank you for the link.
A very interesting article.

[Bjauck]

I guess the way the SP has been creeping up, small shareholders are unlikely to get shares under the proposed placement as cheaply as were offered to the big investors under the placement. Does anybody have any idea as to when the SPP will take place? The new year is not so new now.