HGH - Heartland Group Holdings

[macduffy]

It certainly makes senses to expect the unexpected, tiger. But if something did occur, such as a loss of confidence in a bank followed by a "run" on that bank as its depositors withdrew their money, then the contagion effect on the wider inter-connected banking/financial system would compel a govt to either support the bank or arrange for its "marriage" to a competitor. It could be argued that HBL, as a smaller player, would be easier to handle in such circumstances than its bigger competitors, if such an unexpected happening should occur - remember United Building Society? - but of course sharholders wouldn't see it in those terms!

All hypothetical, of course.

[Arbroath]

PT & Snoopy

no disrespect but this discussion between the both of you is intensely boring and blocking up the thread. Banks are very simple businesses. I am an ex-banker of 20 years.

All banks are insolvent at any point in time if all contractual claims against them are presented at the same point in time as no bank has sufficient liquidity except a central bank which just creates more to escape a crisis etc. Looking at Heartland what matters most is the quality of the management as the senior team of 5-6 people will be making the judgement calls that determine the overall risk and direction of the business. The macro environment Heartland operate in and managements ability to operate the business well are the determinants, not a discussion on Heartlands liquidity. The RBNZ know a lot more about there liquidity than we do as shareholders (not saying that is how it should be). Rather than focus on a liquidity discussion with no real point to it can you turn your considerable analytical skills to looking at Heartlands future prospects, it's return on an increasing capital base, future needs for more capital etc and how those issues might affect its investment prospects.

Heartland has has been a great investment for 4-5 years but my view would be the future outlook is not so compelling.

[percy]

Although I agree with you about banks' liquidity I think Heartland's future outlook is compelling,as their business model of "digital" products, delivered via internet channels, is now in place and gaining traction,as is shown by their online growth successes in "open for business" and seniors applying for RELs online.Further products have now been developed.
I think the market has woken up to Heartland's strong growth,good management,and that is the reason for Heartland's strong share price.
As far as PT's and Snoopy's continuing discussion,I would point out PT should be thanked, for the time and effort he has spent correcting Snoopy's long winded mistake ridden posts.
I would not waste my time.

[RupertBear]

PT & Snoopy

no disrespect but this discussion between the both of you is intensely boring and blocking up the thread. Banks are very simple businesses. I am an ex-banker of 20 years.

All banks are insolvent at any point in time if all contractual claims against them are presented at the same point in time as no bank has sufficient liquidity except a central bank which just creates more to escape a crisis etc. Looking at Heartland what matters most is the quality of the management as the senior team of 5-6 people will be making the judgement calls that determine the overall risk and direction of the business. The macro environment Heartland operate in and managements ability to operate the business well are the determinants, not a discussion on Heartlands liquidity. The RBNZ know a lot more about there liquidity than we do as shareholders (not saying that is how it should be). Rather than focus on a liquidity discussion with no real point to it can you turn your considerable analytical skills to looking at Heartlands future prospects, it's return on an increasing capital base, future needs for more capital etc and how those issues might affect its investment prospects.

Heartland has has been a great investment for 4-5 years but my view would be the future outlook is not so compelling.

Persnally I quite enjoy the banter although I do skip throught Snoopys posts as I have no idea what they actually mean! I absolutely love PTs posts on all sharetrader threads, he/she is so clever. I really enjoy the quirky presentations and I totally respect his/her opinion.

[kizame]

PT & Snoopy

no disrespect but this discussion between the both of you is intensely boring and blocking up the thread. Banks are very simple businesses. I am an ex-banker of 20 years.

All banks are insolvent at any point in time if all contractual claims against them are presented at the same point in time as no bank has sufficient liquidity except a central bank which just creates more to escape a crisis etc. Looking at Heartland what matters most is the quality of the management as the senior team of 5-6 people will be making the judgement calls that determine the overall risk and direction of the business. The macro environment Heartland operate in and managements ability to operate the business well are the determinants, not a discussion on Heartlands liquidity. The RBNZ know a lot more about there liquidity than we do as shareholders (not saying that is how it should be). Rather than focus on a liquidity discussion with no real point to it can you turn your considerable analytical skills to looking at Heartlands future prospects, it's return on an increasing capital base, future needs for more capital etc and how those issues might affect its investment prospects.

Heartland has has been a great investment for 4-5 years but my view would be the future outlook is not so compelling.

I absolutely agree! It would be really interesting for everyone if they turned their considerable skills to forecasting the companies' prospects,much more interesting imop. It's great that they have such an interest,but maybe steer it towards the future of the company,even if it's negative v positive.

[Snoopy]

I absolutely agree! It would be really interesting for everyone if they turned their considerable skills to forecasting the companies' prospects, much more interesting imop. It's great that they have such an interest,but maybe steer it towards the future of the company,even if it's negative v positive.

I have given my view on Heartland's prospects going forwards in some detail over the last few months. I am not going to repeat it. But I have put together this 'Summary Post' in which I will reference and draw together my outlook for Heartland going forwards. My valuation is derived from actual Heartland results, with all the strengths and weaknesses that flow from that data stream implies.

First Decision: Decide how you will value Heartland. Is it a growth company or a dividend paying cyclical? I have argued it is the latter. (refer my post 8495 "Buffett Point 3: Return on Equity"). The key point here is that whether you look at a representative multi-year average (9%) or just last year (10.7%) the historic return on shareholder equity is quite low. Well below par when compared with other banks. This is a flag for growth, if it occurs, being unpredictable.

In the real world such an artificial deliniation between 'growth' and 'cyclical' is not black and white. So for those companies that are 'mainly cyclical' but with a 'small overlaid growth outlook' you can pretend the company is 'only cyclical' and add onto that a premium for growth later.

There has been much talk here about the 'digital strategy' driving Heartland's growth forward. But actually all the banks are doing this. So it is not clear to me that Heartland will gain any relative advantage by 'going digital'. Comments on other 'banking environment' factors that could affect Heartland going forwards can be found here (my post 8616 "Dark Clouds mass over the Heartland").

The upshot of all this is that I value Heartland on the basis of a "Dividend Capitalised Valuation". Why 'dividend' and not 'profit'? Growing a bank is a capital intensive business. The best people to know what part of the profits should be paid out as 'dividends' and what part of the profits should be retained for future growth are the directors. The directors declare the dividend. Furthermore the directors can look through short term cash flow issues and maintain their dividend through a bad year, if they know the future prospects of the business are good.

To make such a valuation you need three things:

1/ Base Data to Work From (my post 8633 "The Data: FY2016 Perspective")
2/ A 'discount factor' to apply to the base data (my post 8629 "Preamble: The Discount Rate Factor")
3/ The Result of the Calculation (my post 8635 "The Calculation: FY2016 Perspective" ).

My fair valuation for Heartland Bank averaged over the business cycle comes out as $1.42, with no growth over the business cycle assumed.

SNOOPY

[h2so4]

Persnally I quite enjoy the banter although I do skip throught Snoopys posts as I have no idea what they actually mean! I absolutely love PTs posts on all sharetrader threads, he/she is so clever. I really enjoy the quirky presentations and I totally respect his/her opinion.

Yes I hope one day PT achieves his dream and upgrades to a Tornado or A Class.

[Snoopy]

My fair valuation for Heartland Bank averaged over the business cycle comes out as $1.42, with no growth over the business cycle assumed.

I need to further explain what the above sentence means.

1/ By 'Averaged', I mean covering a 5-6 year business cycle. Typically over such a business cycle, one might expect the actual share price to wander above and below that average. My 'rule of thumb' for a cyclical is that you might expect the share price to rise around 20% from this average at the 'earnings peak', and drop around 20% from this average at the 'earnings trough'. This corresponds to my 'expected' Heartland share price range as follows:

Bottom of Business Cycle	Average	Top of Business Cycle
$1.14	$1.42	$1.70

The market has HBL nudging $1.70 now. So with all time low interest rates poised to rise, I am saying 'now' is the peak of the Heartland banking profit cycle. I could say Heartland is now 'overvalued' taking an overall business cycle view. But it is no more overvalued than plenty of other shares out there, and certainly not "grossly overvalued". So if I held, I wouldn't necessarily be running for the exit gate just yet.

2/ My valuation is made on 'dividends per share'. This is important because Heartland may issue new shares to make an acquisition. But my valuation would not increase under such a scenario unless the 'dividend per share' increased. This is why being 'earnings per share accretive' , and by implication 'dividend per share accretive', is so important when a new acquisition is made.

3/ It is natural for Heartland to rise in share price around dividend time. So coming up to a say, a 5c dividend, I would expect the Heartland share price to creep to $1.70 + 5c = $1.75 (exceeding the top of my maximum share price range) at the top of the business cycle, just before the dividend was paid.

4/ Whether one should apply a 'modest growth premium' to my cyclical valuation is the next decision. Some would say I should. But as a counterweight to that, I have some doubts as to whether the Heartland results declared recently have realistically provided for future debt imparment. (see my post 7774 "Where did the money go? (second edition)" and the accompanying discussion (my post 7776 "A tale of VW'). Effectively I am saying that the growth in Heartland profits will eventually be undone by the serial underprovisioning for impaired loans that has happened to date.

SNOOPY

[Valuegrowth]

It should break 52 week high but it may have pull back when market becomes weak. I also expect some sort of competition in the banking and insurance industry in the coming years thorough out the world not limited to New Zealand. Strong ones should outperform weak ones.

Do you think its ROE will improve in the coming years from current 11.4%?

Kind regards

[JeremyALD]

I need to further explain what the above sentence means.

1/ By 'Averaged', I mean covering a 5-6 year business cycle. Typically over such a business cycle, one might expect the actual share price to wander above and below that average. My 'rule of thumb' for a cyclical is that you might expect the share price to rise around 20% from this average at the 'earnings peak', and drop around 20% from this average at the 'earnings trough'. This corresponds to my 'expected' Heartland share price range as follows:

Bottom of Business Cycle	Average	Top of Business Cycle
$1.14	$1.42	$1.70

The market has HBL nudging $1.70 now. So with all time low interest rates poised to rise, I am saying 'now' is the peak of the Heartland banking profit cycle. I could say Heartland is now 'overvalued' taking an overall business cycle view. But it is no more overvalued than plenty of other shares out there, and certainly not "grossly overvalued". So if I held, I wouldn't necessarily be running for the exit gate just yet.

2/ My valuation is made on 'dividends per share'. This is important because Heartland may issue new shares to make an acquisition. But my valuation would not increase under such a scenario unless the 'dividend per share' increased. This is why being 'earnings per share accretive' , and by implication 'dividend per share accretive', is so important when a new acquisition is made.

3/ It is natural for Heartland to rise in share price around dividend time. So coming up to a say, a 5c dividend, I would expect the Heartland share price to creep to $1.70 + 5c = $1.75 (exceeding the top of my maximum share price range) at the top of the business cycle, just before the dividend was paid.

4/ Whether one should apply a 'modest growth premium' to my cyclical valuation is the next decision. Some would say I should. But as a counterweight to that, I have some doubts as to whether the Heartland results declared recently have realistically provided for future debt imparment. (see my post 7774 "Where did the money go? (second edition)" and the accompanying discussion (my post 776 "A tale of VW'). Effectively I am saying that the growth in Heartland profits will eventually be undone by the serial underprovisioning for impaired loans that has happened to date.

SNOOPY

I still have an issue with how wide your range is $1.14 to $1.70 are about 50% apart! It'd be hard to be wrong.