HGH - Heartland Group Holdings

[percy]

Would still like to see them make a decent sized aquisition,but what? and how? They are so tight Ar..d (good for us) that may not happen until a recession.

Maybe they will,but in the meantime their organic growth is excellent.
And from what I hear, is set to continue,as the momentum builds.

[trader_jackson]

Zee winner...I'm worried for you looking at the time your post, you must be super exuberant with HBL that it keeps you awake at eery hours in the morning

I'm not surprised, it is hard not to get excited about the ever increasing opportunities Heartland has!

[Snoopy]

Financial Year	Number of New Shares Issued during FY	Total Shares on the Books EOFY	Net Money Raised from Shares Issued During FY
2012	88.704 m	388.704m	$54.946m
2013	0 m	388.704m	$0m
2014	75,562 m	463.266m	$64.774m
2015	6,624 m	469.980m	$9.163m
2016	6,579 m	476.469m	$6.798m
2017	13.659+ m	499.165+ m	$20.0m +
Total Cash Raised			$155.681m +

For those who need some more convincing about what I am saying, the table above lays out the 'new capital' that has been poured into Heartland from its formation. Some years the new capital injection was modest, via the dividend reinvestment plan. Most years the capital required was significant. In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'.

In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things. Some of this 'new capital' is being put toward the digital strategy. The effectiveness of this deployment while promising is yet to be seen! Because of the nature of the growing Reverse Mortgage business this is likely to be cashflow negative until a steady stream of these loans starts to mature. So yet more capital will be required for a while. None of this is meant to be a criticisim of Heartland's strategy going forwards. I am merely pointing out the cashflow implications for the near and medium term.

Any readers still believe that Heartland has 'plenty of capital' and won't be requiring more?

We are getting to the end of FY2017 capital raising now, with just the DRP for the current dividend to go. But with the (surprising) 'increase in new capital' asked for from existing shareholders, and last years placement put to bed, here is my best update of the capital raised subsequent to Heartland being formed. This time I will leave out FY2012, because that capital raising was all about shoring up the company's position 'at birth', and was not part of any future growth initiatives. For comparison, I have added a column showing the dividends declared during the year, before any net cash reduction as a result of the dividend reinvestment plan.

Financial Year	New Shares Issued during FY	Total Shares on the Books EOFY	Net Money Raised During FY	Dividends Paid	ROE
2013	0 m	388.704m	$0m	$13.951m	7.2%
2014	75,562 m	463.266m	$64.774m	$19.930m	8.0%
2015	6,624 m	469.980m	$9.163m	$30.188m	9.9%
2016	6,579 m	476.469m	$6.798m	$37.690m	10.7%
2017	30.973m+	512.902+ m	$45.277m+	$39.485m (f)	tbc
Total Cash Raised			$126.012m +
Total Cash Returned				$141.244m

(f) indicates forecast result.

This shows that the sum of those shareholders who have taken up their dividends as DRP shares and contributed to the cash issues from FY2013 to FY2017 inclusive, the total sum contributed amounts to 89% of the dividends paid out. That figure is sure to rise to over 90% once the DRP contributions from this months dividend are added. This is not an unexpected position for a 'growth' company. But the question is, what return on equity do shareholders receive on these new/reinvested funds?

Unfortunately this is difficult to figure out. Heartland provides a 'segmented result analysis'. But the segments keep changing. This from p45 of AR2016:

-------

Segmental analysis

Operating segments

The banking group operates predominantly within New Zealand and comprises the following main operating segments: Households, Business, Rural

During the period ended 30 June 2016, the following changes were made to the banking group's operating segments:

- a business unit previously reported in the Household division was moved to the Business division.
- lending through Harmoney, which was previously reported in the Business division, was moved to the Household division.
- the non-core property segment was moved into the Business division.

---------

Such trifling details that obscure how the new investments are doing are of little concern to the Heartland faithful. But they are a big concern to a potential investor, outside the tent, like I am. We can however work out the overall return on shareholder equity in the whole company. See the last column in the above table. The ROE figures are improving, but they are consistently below average for NZX companies in general and certainly below average for banks. And remember, I am talking about a five year period that has generally been favourable for banks and finance companies. What will happen when a 'below average' Heartland faces some headwinds?

To summarize what we have here in Heartland is a company that is very hungry for cash, and consistently invests this cash in below average business units. How can this be a recipe for long term shareholder wealth? I suppose one day all this business reinvestment might pay off and my lack of faith in Heartland will make me look like a fool. But right now, there isn't shred of data that shows that Heartland can outperform any other bank in the medium to long term. I think investment in banks can prove rewarding. But I prefer to invest in banks that are at the top of the class, not down there at the bottom!

SNOOPY

[Beagle]

SNOOPY.
Could we please have another of your wonderfull SELL HBL posts.
I love them.
Each one sees the sp react upwards immediately.
You are making me a very wealthy man.
Snoopy thank you.
The beers are on me next time we meet.

He's at it again, we must be due for another SP rise

[percy]

He's at it again, we must be due for another SP rise

I think so.!!...lol.

[Food4Thought]

Snoopy is a wise marketing genius in disguise under the name of a wonderful cartoon character or like a financial detective with a play on words.

He's at it again, we must be due for another SP rise

Iwaitfortherise

[Snoopy]

To work out what that is, I have constructed a table below.

One of the best ways to look for growth rates is look at the rate of growth in dividend payment. A dividend is the amount of cash that management will pay out, taking into account earnings that must be retained for a company's on-going growth. I have represented this in the table below (condensed to the bare bones from a previous post).

Year	Actual Dividend
FY2015	$30.516m
FY2016	$38.118m
FY2017(f)	$43.597m

The actual dividend increase over the three years total (two years incremental period) is projected as:

$43.597m/$30.516m = +42.87%

Another way to express this is by way of compounding single year growth

g^2 = 1.4287 => g = 1.195 => 19.5% compounding annual growth.

Note that this figure is very different to my modelled growth rate below:

Now we can calculate the incremental profit growth percentage:

$5.732m / $112.233m = 5.112%

The average annual growth rate, lets call it 'g',

Solving for 'g' yields an annual growth rate of 2.524%

So how do I explain modelling a dividend growth rate of 2.524%, when the actual dividend growth rate was 19.5% over the study period? The answer is that the 19.5% figure assumes that all of that growth is 'real absolute growth'. My modelling is assuming a much more modest business cycle picture, which nevertheless is underpinned by a long term rising growth rate of 2.524%. Or put another way, the 19.5% of annual dividend growth observed is made up of 2.5 percentage points of 'real underlying growth' and 17% of 'business cycle growth'.

Now I know that this interepretation of the dividend growth will outrage the enthusiasts. One problem is that 'modern Heartland' (including Seniors) has only been operatiing since the FY2015 financial year. Trying to extrapolate what might happen over a full business cycle is fraught with difficulties. So I may yet have to eat my hat over these figures. But I put it to 'the enthusiasts' that the data to support the alternative view (that all growth is real growth) is very questionable. My reasons fro saying that are articulated in my post 9131 'Hunger for New Capital Increased'. When modelling a situation like this, with lack of clear evidence either way, I tend to go for the conservative assumption.

So to summarize, the investment case for Heartland depends on your beliefs

Scenario Case 1/ (Conservative: Generally Cyclical share with small underlying growth): If I invest according to the conservative assumption and I drastically underestimate the growth, then I get the growth for free.

Scenario Case 2/ (Go Go Growth: All growth is real and it will continue at current rates for many years) If I invest according to this scenario and growth falters, then I face a 'cut in dividend', a concommitant cut in 'company market valuation 'and another cut because of 'market multiple deflation'. This three way hit could be pretty ugly.

I do not find the evidence for Scenario Case 2 to be convincing. My investment target range assuming Scenario 1 is below $1.42 (refer to my post 8635 on this thread). So I will not be investing in HBL at this time.

SNOOPY

[percy]

Not a holder Winner69, but I am becoming very uneasy about Heartland. What do you think of this observation?

I am presently visiting the Kapiti Coast and have read today's edition of the Dominion and the local rag the Kapiti Observer, both dated Wednesday 20th July.

On page B7 of the Dominion is an ad for PGG Wrightson Finance, an organization which seems inevitably destined to become part of Heartland. They are advertising a 12 month secured term deposit offering 7.5% per annum. This is despite the small print in the ad that notes any such investment will become a deposit with Heartland that will consequently be unsecured in a couple of months time (no mention of that last clause in the ad of course).

Then on p13 of the Kapiti Observer, a real 'heartland' publication (sic), Heartland are offering a 12 month term deposit rate of 6.25% per annum. This seems to be quite a big gap for what is ostensibly the same investment, even allowing for the fact the 'small print' shows that the PGG Wrightson Finance 7.5% rate is for investments of $100,000 plus.

The headline on the Heartland ad states 'We invest in Wellington'. Immediately I am thinking, no you don't! You are primarily the old Southern Cross and CBS Canterbury Building Societies, investing in the heart of the South Island. Oh and you are also Marac investing in the manufacturing heart of Wellington (yeah right, let me know if you can't count any manufacturer's left in Wellington on one hand!)

I can't help the impression that Heartland is really old rope painted and tarted up as a new frilly bow knot. The marketing budget is being spent to allow the paying of lower interest rates to depositors than a BBB- credit rated organization might otherwise offer. Pull the wrong string and the whole lot might unravel. I really, really hope that I am wrong.

I would like to see Heartland succeed. I think NZ inc. needs it! But is a 'Salt of the Earth' name and a hyped marketing budget really the key to the path of success?

SNOOPY

discl: Hold PGW, who are in the process of divesting PGG Wrightson Finance.

Snoopy's first post on this thread.
Post # 30..... 20-07-2011.
No comment.

[Snow Leopard]

Why I have had to put Snoopy on the Ignore List:



Best Wishes
Paper Tiger

[GTM 3442]

Snoopy's first post on this thread.
Post # 30..... 20-07-2011.
No comment.

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