HGH - Heartland Group Holdings

[Snoopy]

Let me reprise what assumptions I have built into my own valuation modelling for Heartland (under Scenario 1)

1/ Reverse Mortgage market flat.
2/ A 45% reduction in New Vehicle funding, coupled with no reduction in used vehicle funding. A lot of that is due to the end of Holden, which was by far the largest new vehicle funding partner for Heartland.
3/ The effective closing down of O4B small business funding for three months (because O4B can't compete with 0% interest rate loans from the IRD) with O4B recovering to 90% of base level after that.
4/ 'Business Intermediated' loans will likewise shrink by 10%.
5/ Business Relationship loans will decline by 16% for two years, because Heartland indicated pre-Covid they were wanting to wind back this side of the business.
6/ Rural earnings steady.
7/ The collapse of Harmoney, the unsecured consumer loan lender, in about a year's time.

I have been thinking about alternative future earnings paths, and have decided to re-run my earnings model using different input parameters. I am not withdrawing what I have retrospectively labelled as 'Scenario 1'. I am just putting an alternative view forward, acknowledging that alternative future profit paths are possible. Rather than repeat previous workings that do not change, I will report in detail only on the changes I am making.

Reverse Mortgages

I have used FY2019 as a base level of business. However the reverse mortgage business has continued to grow over HY2020 (Australian +9.5% to $887m, New Zealand +4.9% to $536m => Whole portfolio now $1,423). I am going to assume zero growth for the second half of FY2020. Consequently I intend to use these half year figures to create a new base level of activity. Furthermore I intend to model the whole reverse mortgage portfolio showing incremental gains of 2.5% over both FY2021 ( $1,423m x 1.025 = $1,459m) and FY2022 ( $1,459m x 1.025 = $1,495m), This means the incremental increase in turnover for our years of interest are:

FY2021: $1,459m - $1,319m = $140m
FY2022: $1,495m - $1,319m = $176m

We can now use the average ROE for Reverse Mortgages (Heartland AGM 2019 Presentation p15) of 13% to forecast the incremental earnings in our years of attention.

FY2021: $140m x 0.13 = +$18m
FY2022: $176m x 0.13 = +$23m

Motor Vehicle Finance

My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019. A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.

FY2021/2022: -$75m x 0.15 = -$11m

Because I am modelling finance deals with a three year life, this annual loss compounds.

Business Finance

No change

Rural finance

No change

Harmoney and Other Consumer Lending

The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:

0.131 x $367m = $48m

At a 15% return on this loan money, this level of lending would produce:

0.15 x $48m = $7.2m of annual profit.

I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.

	FY2021	FY2022
Baseline Reference Profit	$74.5m	$74.5m
Reverse Mortgage Adjustment	$18m	$23m
Motor Vehicle Finance Adjustment (New)	($11.4m)	($17.1m)
Motor Vehicle Finance Adjustment (Used)	($11.0m)	($22m)
Business Finance (Part 1) Adjustment	($5.3m)	($2.1m)
Business Finance (Part 2) Adjustment	($15.5m)	($15.5m)
Rural Finance Adjustment	$0m	$0m
Harmoney and Other Consumer Lending Adjustment	($3.6m)	($3.6m)
Total Forecast NPAT	$45.7m	$37.2m
No. Shares on Issue	581.0m	581.0m
Earnings Per Share	7.9cps	6.4cps

SNOOPY

[Snow Leopard]

Attachment 11640
The Snow Leopard patiently holds HGH

[winner69]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.

[percy]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.

Jeff's projections were made on 18th March.
The world is now a very different place,and I very much doubt Jeff, or anyone else, would have any idea how the next 3 months,let alone the next 3 years, will turnout for HGH.
I certainly have no idea.
Perhaps the word we have to get used to is "challenging".
I know I could not say HGH is "well positioned."

ps.Anthong Gough is the owner developer of "The Strip" one of the most popular socialising locations in the inner city , the row of restaurants, bars and nightclubs that front onto the Avon River between Hereford and Cashel Streets.
He had to call on his brothers to help him achieve the level of finance before banks would lend to him.
A recent article I read,he said he expected half of his tenants would go broke.Now we expand the ripple affect of that,and we can see a huge amount of capital lost.But whose capital ?.How quickly will they go broke.?What value is a failed bar/resaturant.?Will Anthony Gough go broke.?When will we know the answers.?

pps.Sorry Winner69I could not be bothered replying to your Sunday rant about me being a trader .

[Snoopy]

F20 NPAT

Snoopy forecast $37.2m to $45.7m

Jeff says $77m $80m

Hope Jeff is on the ball.

Let's just correct the record about who said what.

Forecast Profit

	FY2020	FY2021	FY2022
Jeff	$77-$80m	NM	NM
Snoopy Scenario 1 (my post 13361)	NM	$38.7m	$32.2m
Snoopy Scenario 2 (my post 13392)	NM	$45.7m	$37.2m

As you can see I am not trying to second guess Jeff. I am trying to fill in the blanks that Jeff hasn't told us about yet. Personally, I have given up caring about the FY2020 result. Bar one month's trading, it is all historical anyway and it has been distorted by Covid-19. This is why I am using FY2019 as my profit base case. The sharemarket is always forward looking. So it will be the profits from FY2021 and FY2022 that drive the HGH share price forward from here.

The above profit figures are about operational profits. The thing I will be paying attention to when the FY2020 results are released are the one off write downs. Any such write downs will represent Jeff's thinking on where the damage is going to come in the future.

SNOOPY

[Beagle]

This greying and weary looking Beagle https://www.bing.com/images/search?v...x=0&ajaxhist=0 appears to be watchful of a lot of trouble ahead and is a good representation of how I am at present.

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm. I know this from long experience running my accounting practice. Why most people choose to sail so close to the wind with their finances, (its not that hard to build a decent rainy day fund over a number of years if you can show restraint and discipline with spending) is something that has dogged me for decades.

Beagle's are pack animals. I suspect the other one's sense that the real trouble starts in FY21 and carries on into FY22 indicates to this one that his nose for trouble is working pretty well. This greying dog will not try and quantify the extent of the trouble ahead but senses it in sufficient quantity to stay away and look for his next feed elsewhere.

I agree with Baa Baa that there is no better friend for FA than TA but a TA signal on its own is not enough to shake me out of my belief that some share prices are substantially disconnected with the underlying economic reality. A recovery from here in this one would see me put HGH into that category.

My sense is HGH is probably about fair value at present but with little prospect of dividends in the foreseeable future and obvious downside risk, this one is for investors with more patience and tolerance to risk than me.

[winner69]

Sorry Snoops ....misunderstood you ..or didn’t read properly.

[winner69]

This greying Beagle https://www.bing.com/images/search?v...x=0&ajaxhist=0 appears to be watchful of a lot of trouble ahead.

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm.

Rainy day funds not good use of capital they say ..that’s why there’s so much debt floating around.

Government leads by example ....Robertson says the rainy days have arrived so he he has a license to borrow heaps.

[Snoopy]

I agree with Percy there is no way of reliably knowing how much trouble but once the stimulus money runs out we will find out how many people and business's have been swimming naked.

What I find both confronting and perplexing is how few people and business's have a decent rainy day fund to weather a decent storm.

I think what many haven't got their head around yet is that the cushioning of the economy with wage stimuli is to prevent an economic melt down. The wage subsidy will not rescue the economy. It will hopefully allow some employers to think more carefully about the post Covid-19 work environment rather than sacking staff in a panic. But people are going to be laid off in large numbers and it is going to be serious. Some may think it amazing that there are so many folk out there insufficiently prepared for this eventuality. But let's say you are a young well qualified working couple who have just bought a house in Auckland. Would it be reasonable to think that both of you might be locked out from work for two months (the wage subsidy doesn't equate to anything like your normal wages remember) , and then both of you face the prospect of job losses at the same time? Then you both face the toughest job market for a generation? Even loss of income insurance typically only lasts for six months. I don't think there was any reasonable way to prepare for what we are seeing now. Rather than 'swimming naked', what you will see is a whole lot of people on the out tide who think they have a safe pair of togs on, when they all suddenly find out together that their tog's elastic has disintegrated.

So how does this affect Heartland? Heartland looks to the project covering market with loans taken out and repaid within the year. I have been forecasting a 10% drop in credit demand across the business loan portfolio. But this will lead to a much greater proportional loss in profits, because channels like O4B are so efficient already, that you can't cut the cost base to match the fall in revenue. Then there is the savage blow of the government competing with you in the loan market with 0% loans. I wonder if I am being too conservative forecasting 'only' a 10% fall in demand for business loans at Heartland? I had it in the back of my mind that some customers from the bigger banks might migrate to Heartland as a banker of last resort? Respected property developer Anthony Gough, the new face of a typical Heartland customer?

SNOOPY

[winner69]

Jeff often repeats Heartland's fortunes depend on what GDP growth is and levels of unemployment