HLG - Hallenstein Glassons Holdings

[winner (n)]

Hallensteins CEO bought 3,500 shares the other day

I'm told it's always a good sign when insiders buy

https://announcements.nzx.com/attachment/466851.pdf

[winner (n)]

Alvaro seemed rather proud of this achievement -

Hallensteins is now featured in GQ Magazine! This is a significant moment for us as we continue to establish our presence in the Australian menswear scene.


https://www.gq.com.au/partner-content/editorial/one-of-new-zealands-most-beloved-menswear-labels-is-coming-across-the-ditch/news-story/55e76a0ef75fe204746732df8e590f09

[winner (n)]

I see that ex CEO Chris Kincaid is now CFO of NZ Rugby

[Basil]

Alvaro seemed rather proud of this achievement -

Hallensteins is now featured in GQ Magazine! This is a significant moment for us as we continue to establish our presence in the Australian menswear scene.


https://www.gq.com.au/partner-content/editorial/one-of-new-zealands-most-beloved-menswear-labels-is-coming-across-the-ditch/news-story/55e76a0ef75fe204746732df8e590f09

Good stuff.  Its easy to forget about the growth potential of Hallensteins in Australia because a lot of attention is focused on the stellar growth Glassons is enjoying there.  Looking forward to dividend payment date this Friday.

[Basil]

Oh goody, dividend payment day tomorrow just in time for the long weekend.

[Pierre]

Good stuff.  Its easy to forget about the growth potential of Hallensteins in Australia because a lot of attention is focused on the stellar growth Glassons is enjoying there.  Looking forward to dividend payment date this Friday.

I'm on holiday in Nelson atm and wandered into the Hallensteins store this afternoon. I was greeted by a friendly young female staff member who, when I took a sweatshirt to the counter to pay, promptly upsold me to buy a 2nd one. She told my wife she loves working at Hallensteins, it's made her a more confident person and benefited her in other aspects of her life. It's no wonder they are doing well if all their staff are as bright and breezy as this young woman.

I'm looking forward to that chunky dividend on Friday. Mine is taking me to New York and Rome later this year.

[Pierre]

The juicy HLG divvie has just arrived in my bank account!

[Basil]

Good stuff Pierre. I'm sure you'll have a fabulous European holiday knowing that HLG are paying for it.

Watching last nights network news I was very pleased to hear that Labour are taking a pragmatic approach and supporting the India free trade agreement.  Great for the economy, (frankly our economy needs all the help it can get), but more on point, some shareholders will recall that the Chairman Warren Bell commented at the last annual meeting that the proposed FTA with India would be very beneficial for HLG. 
https://www.scoop.co.nz/stories/BU2604/S00382/businessnz-congratulates-labour-for-backing-india-deal.htm

[winner (n)]

RWT took a decent chunk out of that divie eh

Suppose somebody has to help the government out so shouldn't complain

[Southern Lad]

With most of the earnings coming from Australia, HLG not in a position to attach full imputation credits to dividends paid, hence the higher RWT deduction than would be the case with a fully imputed dividend.

[Basil]

With most of the earnings coming from Australia, HLG not in a position to attach full imputation credits to dividends paid, hence the higher RWT deduction than would be the case with a fully imputed dividend.

Quite correct but that's only part of the story. I've been through this with HLG management and for shareholders information this is the situation.
1. In simple terms you generally cannot grant imputation credits with dividends unless the tax has already been paid and credited to the imputation credit account, (ICA).  There are exceptions to this rule as the ICA account is not allowed to be in debit as at balance date, otherwise a 10% penalty applies but its okay during the year, however its clear HLG don't want to get "over their ski's" with the ICA account possibly going into debit.  I think its a shame they didn't pay some tax early or temporarily allow the ICA account to go into overdraft but that's possibly a different discussion for a different time.
2. There is only 4 short months between when they paid the December dividend and the April one and in that timeframe HLG only make one payment of provisional tax.
3. N.Z. profitability for the half year incurred a N.Z. tax liability of $5.521m.
4. The dividend paid was imputed to only 32.7%.
5. Full imputation would have incurred a debit to the ICA of $6.7m
6. If it weren't for timing issues of when N.Z. tax was paid / is payable they would have been able to attach imputation credits at the rate of $5.521m / $6.7m = 82.4%.  This is the best guide to the imputation rate we have going forward over the medium term and is considerably higher than analysts are currently forecasting. (Its clear to me they're not accountants and haven't put a great deal of thought into this). e.g Forsyth Barr are forecasting 47% imputation level for FY26 and 43% for FY27.  Generally their analysis with HLG, I consider to be very good but they are too conservative with their imputation forecasts in my opinion.
7. By the time they come to pay the December 2026 dividend they will have paid the ~ $3.5m terminal tax liability sitting in the balance sheet at the half year point plus two further installments of provisional tax so the ICA account will be in credit to the tune of a robust amount such that it is highly likely the final dividend will be fully imputed and April 2027's dividend may also be able to be either highly imputed or fully imputed.

Caveat to this is, (seasonal effects aside) that N.Z. profitability going forward and the tax impost on same is not dramatically different than what is was in the first half.

My opinion.  While many will feel the pain of a high level of RWT deducted from this dividend, as am I, its well worth noting a couple of things:-
a) Imputation credits attached to future dividends going forward should be dramatically higher in the short term and considerably higher in the medium term.
b) The payout ratio of this dividend as a percentage of EPS during the period is one of the very lowest on record, (conservative positioning for readily apparent risks and low imputation capability is the two most likely reasons I see for this), and the company has a record ever cash balance so some encouragement should be taken in terms of the final dividend for 2026.  My estimate is 35 cps fully imputed.  Forsyth Barr are forecasting 68.5 cps for FY26 which would suggest a final dividend of 39.5 cps, 76 and 82 cps for the following 2 years.  I think its likely the company can easily pay these forecasted dividends but I think they will keep more back for growth and the new roboticized warehouse in Australia is a prelude to a likely expansion in the store growth rate there is how I see it.  3-5 additional stores per annum up from 2 is where I see things going in Australia, not necessarily all Glassons, could be a Hallensteins store each year in the mix too. 

Forsyth Barr in their note of 30 March 2026 are forecasting eps of 85.5 cps for FY26 rising to 95.1 cps and $1.027 in the following 2 years.  Fair value how they see it is $12.80, rating Outperform. Research note is titled "Dressed to Impress"

I think that's a great title, (and fair value price target) and notwithstanding the prevailing uncertainty caused by geopolitical events, its unwise to underestimate the target demographic of 13-30 years old continuing desire to want to get out there dressed nicely and peacock around and impress others and make valuable social connections that will benefit them for life.  The target demographic thinks differently to some of us old buggers and that's something to keep in mind, in my opinion.
Just my musings for the long weekend.  Might head out and spend some of yesterday's dividend tomorrow.

[Southern Lad]

Thanks Basil for the additional colour.

One clarification - Income Tax legislation requires companies to operate an imputation year with a 31 March year end, which is the date the imputation credit account must not be in debit to avoid the 10% penalty.  The balance date (1 August in the case of HLG) isn't relevant other than impacting the dates that provisional and terminal tax is due.  For an August balance date, provisional tax instalment dates are January, May and September, with terminal tax due in April.

[Basil]

Worth noting that if Forsyth Barr are correct about 76 cps in dividends in FY27 at an 82% imputation rate that's just on 98 cps gross = approx 10% gross yield.

Keep in mind EPS has been growing in the low teens for the last decade so not only is the yield superb but so are the prospects for growth in EPS and DPS.