HGH - Heartland Group Holdings

[Baa_Baa]

i sold 30% of my holding at $1.68 and then watched them trade to $1.71 within his minutes. Still got the other 70% but think the valuation is getting stretched so will likely sell more if they show more strength.

Some will actually listen to an ex-banker, others will not. Whoever wins have bragging rights which they will surely exercise when it suits them. Thanks for sharing.

[Beagle]

This sounds like 'greater fool' investing to me. There is no need to evaluate the true worth of the investment if 'the rising trend' means there is always someone else to sell to. No doubt there is significant money to be made when an investment goes from being 'plain overvalued' to 'incrementally overvalued'. The trick to making money is to make sure you don't become the 'greatest fool'. Good luck.

SNOOPY

It's an earnings growth story Snoopy. Sooner or later it'll hit $1.83 with organic earnings growth. With a circa 7% gross dividend yield I am happy to take a patient approach now that dairy has recovered. You can't completely discount the possibility of a credit rating upgrade at some stage either which might lower the cost of their funding somewhat.
An awful lot of quality stocks on the NZX are currently trading within a yard or two of a fairly fulsome price...might as well own the ones that pay a decent dividend yield then

[Snoopy]

It's an earnings growth story Snoopy. Sooner or later it'll hit $1.83 with organic earnings growth.

Spoken as though the core position is solid and incremental growth is a given. I think incremental growth is a given (switched on management look to have a credible growth strategy). But I am not so sure how solid that core of earnings really is.

With a circa 7% gross dividend yield I am happy to take a patient approach now that dairy has recovered.

Heartland keep booking profits on their dairy loans, but has dairy really recovered? Agricultural loans were $628.202m at last full year balance date (30-06-2016) and six months later 31-12-2016) had grown to $712.072m, a rise of 10.4% in just six months. How much interest was actually repaid over that period and how much was capitalised and booked as profit?

From the HY2017 interim report
"Trading conditions for Heartland’s dairy customers improved over the course of the reporting period, with farmers enjoying increases in payments from dairy companies. Dairy customers have generally responded (but with some exceptions? Snoopy edit) well to the difficult trading conditions over the past two years, with most customers managing to significantly lower their operating costs, and where necessary, to consolidate their financial position."

That last bit in bold reads like the bank has taken out their whip.

You can't completely discount the possibility of a credit rating upgrade at some stage either which might lower the cost of their funding somewhat.
An awful lot of quality stocks on the NZX are currently trading within a yard or two of a fairly fulsome price...might as well own the ones that pay a decent dividend yield then

Yes a credit rating upgrade wouldn't surprise me, particularly when Heartlands own ABCP Trust is already on an A+ rating. And yes the dividend while it lasts will support the share price. As I said in another post" the risk profile gross return you are a shareholder might expect, will determine the share price you are prepared to pay.

SNOOPY

[Snoopy]

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 is not shy about raising new capital. Subsequent to EOHY2017 they have raised a lot more new capital with an issue of $20m in new shares in New Zealand and the issue of $A20m of capital notes in Australia. But leading up to the latest reporting point, it is apparent that the balance sheet is already being worked harder. The following information is taken from IFR2017 and AR2016.

Snapshot Time	Shareholder Equity {A}	Finance Receivables {B}	{A}/{B}
EOFY2015	$480.125m	$2,862.070m	16.8%
EOHY2016	$485.688m	$2,928.621m	16.4%
EOFY2016	$498.341m	$3,113.957m	16.0%
EOHY2017	$528.002m	$3,334.800m	15.8%

IFR2017 contained the following guidance on future capital use:

"Moving forward Heartland intends to take a more dynamic approach to capital management, in the same way that the larger banks operate, holding a more efficient level of capital and approaching the market to access capital through multiple issuances that are timed and sized to meet its capital needs."

Looks like lots of opportunities to buy discounted shares and/or bonds will be available to shareholders in the future. That should be enough warning for any shareholder today to wait for some of those new cheaper shares if they wish to increase their holding, rather than pay 'top dollar' on the market.

SNOOPY

[Beagle]

Spoken as though the core position is solid and incremental growth is a given. I think incremental growth is a given (switched on management look to have a credible growth strategy). But I am not so sure how solid that core of earnings really is.Their history of earnings growth has been very sound. Consensus for Fy17 is 12 cps.

Heartland keep booking profits on their dairy loans, but has dairy really recovered? Agricultural loans were $628.202m at last full year balance date (30-06-2016) and six months later 31-12-2016) had grown to $712.072m, a rise of 10.4% in just six months. How much interest was actually repaid over that period and how much was capitalised and booked as profit?All banks have been supporting their customers through the difficult times. I expect most banks will now be expecting their dairy farmers to start paying their loans in a normal manner or sell up.

From the HY2017 interim report
"Trading conditions for Heartland’s dairy customers improved over the course of the reporting period, with farmers enjoying increases in payments from dairy companies. Dairy customers have generally responded (but with some exceptions? Snoopy edit) well to the difficult trading conditions over the past two years, with most customers managing to significantly lower their operating costs, and where necessary, to consolidate their financial position."

That last bit in bold reads like the bank has taken out their whip. All the banks have been applying pressure mate. They've had too.

Yes a credit rating upgrade wouldn't surprise me, particularly when Heartlands own ABCP Trust is already on an A+ rating. And yes the dividend while it lasts will support the share price. As I said in another post" the risk profile gross return you are a shareholder might expect, will determine the share price you are prepared to pay.
SNOOPY

No reason I can see why the dividend story shouldn't continue. Just keep tapping keen new investors for fresh capital Tier 1 and Tier 2 to fund organic growth and pay out about 70% of net profit as fully imputed dividends. I can't see any issue with the continuity of that. Everyone loves a good growth story.

[Snoopy]

From IFR2017

a/ Securitized borrowing facilities are $7.773m lower over the six month comparative period.
b/ External Bank borrowings have increased by $25.013m.
c/ $20m has been raised in part one of a cash issue.

Heartland have reduced their current period liquidity risk profile by:

1/ Increasing the debentures and parent bank borrowings at a faster rate than the receivables.
2/ Increasing the borrowed funds from Heartland bank customers, at a faster rate than the increase of all borrowings.

One last word on liquidity. The 'sideways solution' of having more capital is one way to fix a liquidity problem. However in the case of Heartland, having more capital does not appear to be a fix.

Snapshot Time	Shareholder Equity {A}	Finance Receivables {B}	{A}/{B}
EOFY2015	$480.125m	$2,862.070m	16.8%
EOHY2016	$485.688m	$2,928.621m	16.4%
EOFY2016	$498.341m	$3,113.957m	16.0%
EOHY2017	$528.002m	$3,334.800m	15.8%

Heartland are using their new capital for growth, rather than improving liquidity. So here is an instance of 'new capital' actually increasing the company risk.

SNOOPY

[Snoopy]

No reason I can see why the dividend story shouldn't continue. Just keep tapping keen new investors for fresh capital Tier 1 and Tier 2 to fund organic growth and pay out about 70% of net profit as fully imputed dividends. I can't see any issue with the continuity of that. Everyone loves a good growth story.

Financial Year	Capital Notes Issued during FY	New Shares Issued during FY	Total Shares on the Books EOFY	Net Money Raised During FY	Dividends Paid	ROE
2013	0 m	0 m	388.704m	$0m	$13.951m	7.2%
2014	0 m	75,562 m	463.266m	$64.774m	$19.930m	8.0%
2015	0 m	6,624 m	469.980m	$9.163m	$30.188m	9.9%
2016	0 m	6,579 m	476.469m	$6.798m	$37.690m	10.7%
2017	$22.000m (f)	30.973m+	512.902+ m	$45.277m+	$39.485m (f)	tbc
Total Cash Raised	$22.000			$126.012m +
Total Cash Returned					$141.244m

(f) indicates forecast result.

Make that $148 paid in by stakeholders for every $141 paid out to shareholders (if you go by the historical record so far). Even 100% 'Retained earnings' it would seem is not enough in the case of Heartland.

Heartland, NZ's first cash flow negative bank? Perhaps it would have been sustainable if no dividends had ever been paid?

SNOOPY

[Beagle]

You're over-thinking it. Current year EPS is forecast at 12 cps. Current year dividends are forecast at ~ 8.5 cps

[iceman]

No reason I can see why the dividend story shouldn't continue. Just keep tapping keen new investors for fresh capital Tier 1 and Tier 2 to fund organic growth and pay out about 70% of net profit as fully imputed dividends. I can't see any issue with the continuity of that. Everyone loves a good growth story.

I would like to see them offer 4-5% discount for DRP. Reckon very little cash would flow out in dividends then and lot of the growth could be financed "internally" and it would be effortless and cheap "raising of capital" !!

[winner69]

You're over-thinking it. Current year EPS is forecast at 12 cps. Current year dividends are forecast at ~ 8.5 cps

EPS 12 cents is more than $62m

Jeff wouldn't want it to be that much over guidance would he (proactively managed)

But then we know current guidance is a load of rubbish anyway ' a disgrace really