HGH - Heartland Group Holdings

[Snoopy]

Snoops ...that ‘Capitalised net interest income’ doesn’t form part of Operating Cash Flows on the ‘Statement of Cash Flows’ (because as you say they haven’t got that cash yet)

The $24,859 does show as an item on the reconciliation between Profit and Operating Cash Flow .....as a non cash item.

Winner I was referring to the second page of the 'CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS' which is the reconciliation between 'Profit' and 'Operating Cashflow' (I didn't make that clear). So I agree with you. You have re-expressed what I thought I was saying in a clearer way.

SNOOPY

[Biscuit]

Isn't this how banks operate? Banks typically do borrow money from third parties to lend it out to other people and they make money by charging a higher interest rate than they pay.

Banks are not supposed to lend out only their own money or money they first earned ....

:

Interestingly, that is not how banks principally operate. When a bank writes a mortgage, they create the money digitally by typing the numbers into your account.

[Snoopy]

Fair enough - but actually, there is a regular cash flow, it is just a bit slower than with other banks.

Cash flows every time a REL is paid back ... and I think (from memory) the average length of a REL mortgage is something like 7 years (could be less, but not sure).

In a 'steady state'/'modest growth' loan model you are right. But Heartland are growing their REL business. The amount paid back by maturing loans won't be enough to finance the next larger wave of loans. So as long as the Reverse Mortgage business is growing to plan, Heartland will need to raise more incremental capital over and above what they can collect by recycling their REL loans At this stage of the Heartland's Reverse Mortgage business development (10%-20% growth in the REL loan book YOY) the cashflow is negative. This is not in dispute as the cashflow reconciliation with profit statement confirms it. Without raising new capital, by either raising new bond money or new share money, the REL growth is restricted the profit booked on the REL loans that have matured each year. I don't see that underlying growth potential as sufficient to support Heartland's growth ambitions in the Reverse Equity Release Loan market.

It sounds like you have a fundamental problem with REL's. If you do, you should not invest into companies which offer REL's. Easy as that.

... if you don't like risk, better invest into government bonds ...

i am quite accepting of the risk. I am an HGH shareholder, but I bought in at a much lower price than where HGH is trading at today. Another way to de-risk your investment is to buy it more cheaply to start with. I would be keen to buy more Heartland shares. But not at the price they trade at today, I want to pay the discounted HGH entry price at the time of the next cash issue!

SNOOPY

[Snoopy]

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018: Heartland Group Holdings restructure set up
FY2020	6.5cps + ?.?cps
Average FY2015.5 to FY2019.5 inclusive	8.80cps

I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018: Heartland Group Holdings restructure set up
FY2020	6.5cps + 4.5cps
Average FY2016 to FY2020 inclusive	9.00cps

I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.

SNOOPY

[Beagle]

Another way to de-risk your investment is to buy it more cheaply to start with. I would be keen to buy more Heartland shares. But not at the price they trade at today, I want to pay the discounted HGH entry price at he time of the next cash issue!

SNOOPY

I "hounded" some more up first thing this morning at $1.87...the early dog gets the bone

[winner69]

I "hounded" some more up first thing this morning at $1.87...the early dog gets the bone

That’s expensivevcompared to the $1.54 or so at last DRP

[Snoopy]

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.8c / (0.72 x 0.075) = $1.63

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.63 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation.

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

9.0c / (0.72 x 0.075) = $1.67

A reminder here that NTA was

($687.600m - $72.159m) / 577.468m = $1.07 cps

at the half year FY2020 balance date. This means my 'fair valuation' is at a good premium (+56%) to net tangible asset value.

This $1.67 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target share price range for HGH of $1.34 to $2.00. $1.90, where the share is trading today, looks a ten cents or so above fair value. My target accumulation price (10% below fair value) is now $1.50. And yes I could add the upcoming 4.5c interim dividend onto that fair value.

SNOOPY

[jonu]

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

9.0c / (0.72 x 0.075) = $1.67

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.67 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.34 to $2.00. $1.90, where the share is trading today, looks a ten cents or so above fair value. My target accumulation price (10% below fair value) is now $1.50.

SNOOPY

Hasn't traded there since March 2019. What are the odds?

[Beagle]

You really need to get a new valuation model Snoopy. Much erlier today I called it as fair value at $1.89, which is exactly where the VWAP and closing price turned out to be.

You really are in dreamland if you think you can buy more for $1.50.

[Snoopy]

You really need to get a new valuation model Snoopy. Much earlier today I called it as fair value at $1.89, which is exactly where the VWAP and closing price turned out to be.

You really are in dreamland if you think you can buy more for $1.50.

I didn't say I expected the price to go down to $1.50 Beagle. I said if the price did go down to $150, or $1.54.5 cum divie , then I would accumulate some more. I don't have to buy more. I would like to buy more at the right price. And buying at the right price on today's inflated market is a rare opportunity, not something I would expect to have every day.

My simple valuation model is based purely on dividends paid over the business cycle, with all the strengths and weaknesses that are inherent in that method.

Hasn't traded there since March 2019. What are the odds?

Not good. But if HGH need to raise some new capital to buy UDC for example, then you never know. I am ready should the opportunity present itself.

SNOOPY