HGH - Heartland Group Holdings

[Snoopy]

Snoopy wrote:
"If a striped suited 'Beagle Boy' goes into a Heartland Bank and commands the staff to put all of the till proceeds in his swag bag, then the said Beagle Boy leaves with a limp empty sack (because Heartland don't deal with cash anymore), can he be arrested for bank robbery?"

Any self respecting Beagle would be barking mad to do such a thing.

For those too young to get the reference: a 'Beagle Boy' ain't no hound. A Beagle Boy is from the dark side of Disney:

https://en.wikipedia.org/wiki/Beagle_Boys

I'm with Iceman on this. Just because they do things differently and don't want the overheads of an extensive branch network and certain types of low margin lending doesn't mean they won't quack loudly when it comes reporting time

Heartland may be getting better while the bigger banks stand still. In absolute terms though, HBL is still a lower margin business, with a lower return on equity, than the bigger banks.

The other point we haven't even really touched on is who wants to own Aussie banks when you can't claim their franking credits ? Any sensible hound knows if you've got to let the taxman have two helpings of food before you get to your food bowl you won't be as well fed as you would off HBL divvies.

Well this hound, in the case of ANZ, went to the trouble of working out the comparative yield, rather than assuming full imputation credits would always skew the value equation in Heartland's favour:

1/ Data from my post 432 on the ANZ thread feeding the 'fair value' at 6.5% yield calculation including NZ impuation credits, (not fully imputed for NZ sharehodlers, but NZ shareholders do get some) ignoring franking credits gives a 'business cycle fair value price' for ANZ shares on the NZX of $NZ24.67.

2/ Data from my post 8633 on this Heartland thread feeding the 'fair value' at 7.5% yield calculation, including NZ impuation credits, give a 'business cycle fair value' price for Heartland shares on the NZX of $NZ1.42.

Based on today's closing price of $1.66, Heartland is now 17% overvalued (on a whole of business cycle basis).

Based on today's closing price of $34.90, ANZ is now 41% overvalued (on a whole of business cycle basis).

At first glance, this comparison supports Roger's point about the greater value of impuation credits offering a better deal for tax resident New Zealanders, skewing the value comparison Heartland's way. But ANZ value is not driven by NZ investors. This is why I redid my data from an 'Australian perspective' (counting Australian franking credits, disregarding imputation credits) in post 443 on the ANZ thread. This gave ANZ fair value at $A31.74 or $NZ34.88 (with $NZ1- = $A0.91). By this measure ANZ is pretty much fair value right now in $NZ terms.

In my view, ANZ is still the better investment proposition for those buying at today's prices. However, because I always like to buy at 'below fair value', I wouldn't be buying either HBL or ANZ at today's prices!

SNOOPY

diacl: hold ANZ

[Beagle]

Standby for financial engineering Snoopy. Tier 1 capital raise probably a necessary precursor to a Tier 2 capital raise of maybe $50 - $75m followed by a share buyback.
That'll boost their return on equity. All time new highs...quite content to let my profits run as I'm sure many others are.

Participants in the SPP plan are now up a neat 20 cps within a couple of days of the shares being issued. Who said there's no such thing as a free investment lunch

[Beagle]

Geez Roger, wasn't snoopy,s sell down price 1.74.....amazing how instep you two are

I won't be selling at $1.74 mate. I see fair value as at least $1.76 but as my slightly tongue in cheek post about it potentially being worth as much as $2.50 suggested, I do think HBL's significantly superior track record of earnings growth and projected earnings growth as well as full imputation credits on dividends are significant matters which make this company very attractive indeed relative to Australian bank stocks.

[Snoopy]

I think the answer to this one should be "Yes". You will pay a bit more for it, but they will do mortgages.

Last I read all of the Heartland 'normal' mortgages had been syndicated out to Kiwibank. However, I will be happy to be corrected on this point if I am wrong.

I believe these 'syndicated Kiwibank mortgages' are different to the on line offerings of 'premium priced' mortgages that Heartland are threatening to introduce on their digital platform, for those too scared to speak to a real banker at another bank!. But 'on line' means you don't have to visist a Heartland bank to get this kind of mortgage.

SNOOPY

[Snoopy]

Standby for financial engineering Snoopy. Tier 1 capital raise probably a necessary precursor to a Tier 2 capital raise of maybe $50 - $75m followed by a share buyback.
That'll boost their return on equity. All time new highs...quite content to let my profits run as I'm sure many others are.

Participants in the SPP plan are now up a neat 20 cps within a couple of days of the shares being issued. Who said there's no such thing as a free investment lunch

It could happen Roger. Mind you, I read one article that says ANZ now has too much capital and we ANZ shareholders can expect a buy back there too. But at this point I prefer to work with what I definitely know, so let's wait and see.

SNOOPY

[Jantar]

Last I read all of the Heartland 'normal' mortgages had been syndicated out to Kiwibank. However, I will be happy to be corrected on this point if I am wrong. ...

You may well be right. Yet I am sure I read somewhere in the AR that they were carrying some mortgages.

[ziggy415]

I won't be selling at $1.74 mate. I see fair value as at least $1.76 but as my slightly tongue in cheek post about it potentially being worth as much as $2.50 suggested, I do think HBL's significantly superior track record of earnings growth and projected earnings growth as well as full imputation credits on dividends are significant matters which make this company very attractive indeed relative to Australian bank stocks.

All good....I do wonder where and why the large buy orders came from late on a Friday night to push up the sp. ...is there some news around the corner but also wonder where imputation credits come from and how long can they last......p.s. I do like snoopy posts even tho it's way over my head most of the time (but don't tell him that)just our little secret

[trader_jackson]

All good....I do wonder where and why the large buy orders came from late on a Friday night to push up the sp. ...is there some news around the corner but also wonder where imputation credits come from and how long can they last......p.s. I do like snoopy posts even tho it's way over my head most of the time (but don't tell him that)just our little secret

Insto's who missed out but want in on the action?

[Snoopy]

Why its worth more.

1. We cannot ignore the fact that HBL has grown its EPS faster in recent years than the Aussie banks.
2. This trend is set to continue, see below therefore a PE premium is warranted compared to its peer group.
3. The following are the forecast PE's for its peer group for FY17, FY18 and FY19 followed by average analyst expected EPS growth in percentage terms bolded from FY17 to FY19 [B]All data off average analysis forecast off 4 traders
Bendigo BEN 13.2, 13.1, 13.3, EPS growth expected -1%
NAB 13.6, 13.4, , EPS growth expected 13 4%
WBC 14.5, 14, 13.6, EPS growth expected 6%
ANZ 13.4, 13.2 12.5, EPS growth expected 7%
Bank of Queensland BOQ 12.9, 12.6 12.3 4.5%
HBL 13.8 12.6 11.9 , EPS growth expected 14%

The average FY19 PE which takes into account average forecasted growth to FY19 is 12.77

Good work here by Roger, but time to add a bit more information for those highlighted banks that trade in New Zealand

Bank	Fitch Credit Rating (NZ Operations)	Approx Probability of Default Over 5 years
NAB, trading as BNZ	AA-	One in 300
Westpac New Zealand Limited	AA-	One in 300
ANZ Bank New Zealand Limited	AA-	One in 300
Heartland Bank	BBB	One in 30

I think this exposes the myth that what we are looking at here is Heartland up against a 'peer group'.

4. Even if you make the case, (which I don't) that HBL will only enjoy two more years of abnormal growth before reverting to the very modest rates the Australian banks are "enjoying" for HBL to be trading at the average of its peer group the SP is likely to outperform its peer group by 12.77 / 11.9 = 7.3% over the next two years.

What you have calculated here Roger is what will happen if Heartland lives up to the consensus of what a broad group of analysts think will happen. However, these expectations say nothing about 'execution risk'. The probability of success of the respective business plans comes very muuch to the fore in what is likely to happen. And most analysts with their glib forecasts do not consider this.

5. Even now based on average estimated 2017 earnings the peer group is trading at an average PE of 13.56 and HBL at 13.8 represents only a tiny premium which taking into account its historical growth outperformance and projected stronger growth and I think the current market PE premium is not properly recognizing this superior growth.

6. I think given the distinct possibility that HBL's growth will continue to outperform its peers post FY19 I think that a minimum further 7.3% rerating will happen over the foreseeable future, probably this year.

7. Relative to its peer group I therefore value HBL at 1.64 + 7.3% = $1.76.

Much of the historical outperformance comes from Heartland deftly disposing of what seemed to be an absolute basket case of land and property loans at the time. Given these are now largely disposed of, it doesn't seem right to assume that historical growth from this source will continue and so influence the future ghrowth rate going forwards. I don't think any industry forecaster , let alone Heartland have stated, that they will outperform their peers post FY2019. Note I am not saying this isn't possible, or it won't happen. But I would be cautious of using invented hyperbole to justify your value of Heartland shares post FY2019.

8. I think you can easily make the case that relative to its peer group given its considerably stronger historical and projected growth a PE premium of 1 on FY17 projected earnings is warranted.
Average FY 17 PE for Aussie banks excl HBL is 13.52.
HBL's current PE 13.8 HBL should be trading on a FY17 PE premium of at least 1 = 14.52 14.52 / 13.8 = 5.2% increase from here = $1.73

The problem we have valuing Heartland is that most of the real peer group was destroyed in the great finance sector collapse in NZ. I suspect that if you are looking over the ditch, the best comparatives are other finance companies that, like Heartland, do not pass the duck test. The closest I have found to Heartland is the unlisted soon to be former subsidiary of the ANZ bank, UDC Finance, in New Zealand. In NTA terms in what we have to assume was a well thought out disposal process, it sold very recently to the Chinese at a much smaller premium to NTA than Heartland is trading at now.

9. Investment case summary: I therefore think fair value for HBL is between $1.73 and $1.76 on an ex dividend basis and note it currently trades on a theoretical ex dividend price of $1.60.5 ($1.64- 0.035) so we have another ~ 10% rerating to go and then from there the price should continue to drift up in line with the 14% earnings growth to FY 19. My 2 year target price is therefore 1.76 x 1.14 = $2.01 and in the meantime based on 8.5 cps in annual fully imputed dividends we will be enjoying a gross dividend yield of 7.36% (8.5 / 160.5) / 0.72.
Disc: Hold and fully subscribed to dividend reinvestment plan.

I think at the very least in your valuation, you need to make an adjustment for business execution risk. In my own analysis I did this my requiring a gross return of 7.5% on the projected dividend flow, verses 6.5% for the big banks. I am not sure this is the best way to do it. But it is the best that I have come up with, so far.

SNOOPY

[trader_jackson]

Good work here by Roger, but time to add a bit more information for those highlighted banks that trade in New Zealand

Bank	Fitch Credit Rating (NZ Operations)	Approx Probability of Default Over 5 years
NAB, trading as BNZ	AA-	One in 300
Westpac New Zealand Limited	AA-	One in 300
ANZ Bank New Zealand Limited	AA-	One in 300
Heartland Bank	BBB	One in 30

I think this exposes the myth that what we are looking at here is Heartland up against a 'peer group'.









SNOOPY

You bring up an important point Snoopy, hard to believe heartland bank still has such a credit rating, I would have thought that, these days, it would be much higher (and I don't think I am alone in this thinking).. you would have also thought with all the talk of credit tightening on houses and apartments (that HBL is not exposed to anywhere near as much), both here and in Australia, that the big banks would have some pressure on their ratings... just my thoughts anyway.