HGH - Heartland Group Holdings

[winner69]

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.

t_j -- here's the rationale for a BBB rating. Is worth a read to clarify your thinking
https://www.heartland.co.nz/Uploads/...0published.pdf

Heartland have a higher risk appetite relative to peers ....and pay too much out in dividends

To answer why the rating is not higher maybe the paragraph 'Rating's Sensitivities' will explain why (and note the limited upside bit)

[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.

The credit risks I quoted refer to the NZ operations of the big 3 opposition Banks. Whatever happens to the Australian Property market is irrelevant to the RBNZ, even if it is very relevant to NZ shareholders of ANZ, WBC and NAB!

Heartland is much more exposed, in percentage of portfolio terms, than any of those comparative banks to what happens in rural NZ. This is a big risk albeit different to the housing market risk which I acknowledge is an issue for those other banks. I also think that the Seniors Reverse mortgage market could be badly hit in any housing market downturn. It is easy to borrow money against an asset that is seen to be rising rapidly in value. If that asset is falling in value the psychology of taking out a loan against that asset is very different.

Risks and rewards are here, but they are different, and not necessarily favourable for Heartland.

SNOOPY

[Beagle]

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'.
They are the peer group Snoopy whether you like to admit it or not other banks are into unsecured lending in a huge way too. The difference in credit ratings is something you make a valid point about but a 1:30 chance of failure over the next five years means that HBL as a far as I am concerned should carry a 3.33% risk premium amortized over 5 years = .67% risk premium per annum so in my efficient market hypothesis they should trade at approx. a 0.85 PE discount (12.15 / 13 gives the appropriate PE discount. Yes there's execution risk but I believe we are seeing good traction in their new initiatives so there's also execution risk that they'll outperform with their new lending initiatives. We could pontificate endlessly on possible outcomes post FY19, (too far in the future to reliably estimate), and as to reasons why their EPS growth has outperformed its peer group in the past but the fact remains in recent years and projected for this year and the next two their EPS growth is significantly superior to the other banks so one can very easily make the case that they are executing extremely well and deserve the benefit of the doubt regarding execution risk going forward. If one accepts this argument then they deserve a significant PE premium for their superior growth rate, far more of a premium than the discount their lower credit rating implies.

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.
See above

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.Nobody is forecasting further out than FY19 but its worth noting that HBL seems quite progressive on the digital front and that's the way the world is shifting.

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.[COLOR="#0000CD"Its a pure finance company that loses the ANZ's A- credit rating and may well move to sub investment grade. This is sure to have impacted the price.[/COLOR]

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

Now that dairy has recovered I am happy with their risk profile. I prefer to back N.Z. companies wherever possible...lets be honest the ANZ haven't exactly covered themselves in glory with some of their corporate basket case lending in recent years. Plenty of losses yet to be booked on N.Z. corporate lending from some very poor historical committee decisions. You'd be hoping their lending committees in both Australia and New Zealand have had a thorough "refresh" Don't want too many more Dick Smith's, Pumpkin Patch and their ilk do we ! I suspect there might be one or two people on this forum very pleased to see me backing HBL boots and all
I think the other thing Snoopy is if one wants to invest in this sector you have to find a better alternative than HBL and I for one do not believe you've made a convincing case with ANZ. Technically breaking through to a new all time high there is nothing to suggest this stock won't travel higher still.

[Beagle]

Roger, please clear some messages from your inbox so you can be messaged

Done that mate, fire away

[JeremyALD]

I honestly don't see the point in the back and forth with Snoopy. As long as I've followed the thread Snoopy has been saying HBL is a poor investment and the view has been well heard. If you don't like HBL Snoopy why keep posting about it? Clearly your view is not going to change and we'll all just have to wait and see whilst HBL is busy executing their plan and growing dividends successively as they have done for the past five years.

Just recently you agued with me when I said the SPP is a bargain. Well guess what it was. On the 5K in the SPP I made over 10% with little to no risk.

Also of course it has a lower credit ranking and is higher risk. The bank is 10x smaller than the big 4 banks. That comes with greater risk, but also greater growth opportunities. ANZ is already dominating market share in NZ, has increased funding costs and little room to grow unless they're willing to give up margins. A lot of the other big four are in similar positions. Their lending growth is also going to slow in NZ now that house prices are starting to stablise. There's plenty to like about HBL at the moment given they play a different game and position themselves nicely.

[Beagle]

I honestly don't see the point in the back and forth with Snoopy. As long as I've followed the thread Snoopy has been saying HBL is a poor investment and the view has been well heard. If you don't like HBL Snoopy why keep posting about it? Clearly your view is not going to change and we'll all just have to wait and see whilst HBL is busy executing their plan and growing dividends successively as they have done for the past five years.

Just recently you agued with me when I said the SPP is a bargain. Well guess what it was. On the 5K in the SPP I made over 10% with little to no risk.

Also of course it has a lower credit ranking and is higher risk. The bank is 10x smaller than the big 4 banks. That comes with greater risk, but also greater growth opportunities. ANZ is already dominating market share in NZ, has increased funding costs and little room to grow unless they're willing to give up margins. A lot of the other big four are in similar positions. Their lending growth is also going to slow in NZ now that house prices are starting to stablise. There's plenty to like about HBL at the moment given they play a different game and position themselves nicely.

I agree. Snooper my friend, its time to turn your talents to finding opportunities. I brought up ANZ's chart last night. In late 2013 they were $39 a share and are presently just under $35 Kiwi a share.
During that same period of time HBL was ~ 80 cents a share and they have more than doubled and from a TA perspective look like going higher still. Fact is my hound dog friend you have been consistently catching the wrong scent with this one so its probably time to go hunting elsewhere. I stand by the work I did on comparative value and think HBL fair value is at least $1.73-$1.76 and that assumes they only grow at the same rate as their peer group post 2019, (which I think is a VERY conservative assumption) so I won't be selling even at the top end of where I presently see fair value. HBL may get a credit rating upgrade in the next couple of years. Of course there's business execution risks, they exist for all business's including ANZ but risk and reward go hand in hand, should that be paw in paw.

[trader_jackson]

Would be nice to see HBL upgraded

For what it is worth, I do appreciate Snoopy's posts, even if I don't necessarily 'agree' with them

[Snoopy]

I honestly don't see the point in the back and forth with Snoopy. As long as I've followed the thread Snoopy has been saying HBL is a poor investment and the view has been well heard. If you don't like HBL Snoopy why keep posting about it? Clearly your view is not going to change and we'll all just have to wait and see whilst HBL is busy executing their plan and growing dividends successively as they have done for the past five years.

Any company with a projected positive cashflow and profit is a good investment at the right price. I agree with 'the enthusiasts' that potentially Heartland is a good investment. I disagree at the price the 'good' adjective kicks in. As new data comes in I can re-evaluate my position as to what investment point I mark as 'good' for Heartland. So I express a new opinion. I try not to repeat myself, but sometimes when opponents roll out the same old arguments the counterpoint is the same old rebuttal. My position has changed. A few years ago I was very doubtful at 80c. Now I think paying $1.14 for a Heartland share would be a good price to pay. The 'runs on the board' by Heartland management over the years have changed my opinion.

In my case, I have been invested in ANZ and WBC for years. Although ANZ and WBC are not strictly comparable in my view, are at least in the finance sector. So 'good' for me has to be better than those two in a longer term sustainable way. Hence my fixation with the ANZ and ANZ subsidiary UDC comparisons.

Just recently you argued with me when I said the SPP is a bargain. Well guess what it was. On the 5K in the SPP I made over 10% with little to no risk.

It comes down to a question of price (what you pay) to value (what you get). Clearly you have paid less for those shares you acquired in the SPP, compared to what you would have paid had you acquired those shares on market at today's market price. However, my argument is that in the medium term you may have overpaid in both cases.

Also of course it has a lower credit ranking and is higher risk. The bank is 10x smaller than the big 4 banks. That comes with greater risk, but also greater growth opportunities. ANZ is already dominating market share in NZ, has increased funding costs and little room to grow unless they're willing to give up margins. A lot of the other big four are in similar positions. Their lending growth is also going to slow in NZ now that house prices are starting to stablise. There's plenty to like about HBL at the moment given they play a different game and position themselves nicely.

What investors have a choice of buying shares in is the wider ANZ group, not 'ANZ New Zealand branch'. ANZ has had their own little growth foray into wider Asia that the new CEO has pared back (at the retail leve at least). I agree that Heartland has more growth potential, even than the wider ANZ group. This is why I assumed no growth for ANZ, and growth in proportion to the increase in share capital in the case of Heartland. ANZ still won my 'head to head' dividend return comparison, despite the higher growth I was attributing to Heartland.

SNOOPY

[Jantar]

.... I stand by the work I did on comparative value and think HBL fair value is at least $1.73-$1.76 and that assumes they only grow at the same rate as their peer group post 2019, (which I think is a VERY conservative assumption) so I won't be selling even at the top end of where I presently see fair value. .....

Interesting. I guess all investors have different criteria by which they assign fair value. I considered Snoopy's method to be good for a cyclical stock, but didn't consider long term trends. My own valuation puts HBL currently at $1.64, with a 10% annual growth. I consider any share to be a buy at 10% less than current valuation and a sell at 15% above current valuation. Anything in-between is a hold.

I guess I won't be selling any time soon either.

[trader_jackson]

Interesting. I guess all investors have different criteria by which they assign fair value. I considered Snoopy's method to be good for a cyclical stock, but didn't consider long term trends. My own valuation puts HBL currently at $1.64, with a 10% annual growth. I consider any share to be a buy at 10% less than current valuation and a sell at 15% above current valuation. Anything in-between is a hold.

I guess I won't be selling any time soon either.

You must be conservative... 10% annual growth? is that all?