HGH - Heartland Group Holdings

[BlackPeter]

I don't usually post unless I have something to say, but Monday was the final straw with Heartland.
I have followed this company for many years (at one stage it was my biggest position), listening to the story of its potential, while feeling uneasy about its annual reporting, online annual meetings, smoothed earnings, rapid cap raises, increasing share count, not passing full interest rate costs onto customers, provisioning and a bunch of excuses for why they treat retail investors like sh*t.
 
While I have to rely on my own instincts, and a bit of advice from the others on Stocktalk, I decided to hold on before making any hasty decisions, in order to have a chat with Leanne Lazarus (CEO Heartland NZ) at the NZSA Auckland Meeting about a month or so ago. I liked Leanne and really appreciated her fronting up (I haven't seen Jeff's face in person for years). Leanne, after being unable to answer a few tough questions from the floor, about Challenger being loss making and how they were going to fund the whole thing (she really played down the chance of a capital raise), really put the final nail in the coffin. I did see Ronaldson at the NZSA meeting, so he may have a different take on things.

I used the opportunity after the meeting to spend another 40 minutes or so with Leanne, asking all the questions I have never really had the chance to ask. After that conversation and a better understanding of how the bank operated, I went and sold half my shares (about 30,000 ish), in order to reduce my exposure. Heartland is not a real bank (it might soon be) or a fintec (what bullsh*t), it relies on a rolling deal with an Aussie bank (from memory it was Westpac) to use their banking infrastructure. In fairness she gave some good answers and it is hard to be put on the spot late at night. Overall, I was very impressed with her, but she is not the one pulling the strings. Jeff must be a smart guy, because he, like a certain prime minister, knows when to get out.

I feel very sorry for those who have lost money and who bought in at the $1.50 to $1.60 range (or higher). My only saving grace is that I bought a truckload in the depths of the pandemic, so have come out slightly up. As far as the cap raise goes, the steep discount to the market price has once again eroded shareholder value. Large funds may be able to buy up this garbage without worry and pump and dump it onto their retail clients, but retail investors will have to ride the lightning.

Can you make money in this stock? - I am sure you can, but I like to deal in companies. The shift towards Auzzie could be a long-term masterstroke, but for me, it is about trust, and when it is gone- it is gone.
The market is suffering at the moment, but there is much better quality out there with better long-term returns to be had. Basil may be able to move in and out (making money), but I want a company to hold for the long term, with management I can trust.

If you are new to Heartland, pick up an annual report from a quality company like Turners or Mainfreight and hold it next to an annual report from Heartland. Even better would be to go to all three meetings (online if you have to) and experience the difference for yourself. I am not an expert in banking, NIMs, etc and I defer to others' wisdom on this forum, but I have background in dealing with thousands of people at all levels and my "spidey senses" tell me that there is something not right with this company.

I'm out. I'll chalk this one up to experience and some lessons learned. Best luck to those holding and I am sure there is some money to made out of the cap raise, if you play your cards right. Long term- I don't want to ride this horse. Profits may be going up, but you will need to keep a close eye on that share count.

Discl: No longer a holder as of Tuesday. I saw a quick spike and I took the exit (not interested in a quick buck with this kind of animal). I like catching a sugar hit (getting in at a good price for a quick gain), like everybody else, but after the party, you are still left with a bad investment in a volatile company. Even though I can now buy back in at $1, there is no certainty that Aus will pay off and you won't get screwed in the future. I currently hold both MFT and Turners (so I am biased!).

Well written and well argued post. This is the stuff which improves forums like this.

Having said that - while I can see your perspective, if you look at it from other viewing angles, there is still a lot of long-term gain in HGH.

Just looked into my spreadsheet - average P/E over the last 10 years was 9.8 and this came with an EPS CAGR (10 years) of 8.3. Not bad, isn't it? - even if the company is currently in a dip. From a long term investor point of view, these are the times when buying is partiuclarly good.

I understand your points re treatment of retail investors. You are right - it is not good, and it does show a certain arrogance of board / management. That's a risk factor which clearly makes the retail investor journey less pleasant and beneficial, but I doubt it will bring the ship to sink (but sure, this is a risk as well). Anyway - clearly one of the factors to consider, but typically better to get out on a high (which is not now) if one sees that as a critical risk ;

The Reverse mortgage industry itself clearly has tailwind - and Heartland is the leading provider in this field. Would be a pity to give up this advantage.

And yes, Heartland's (online) banking procedures are not known for being particularly convenient or flash - mediocre at best. Clearly not one of their strengths ... but then, they share this mediocracy with a number of other banks I don't expect to go down either.

So - as with any other investment, there are pluses and minuses. I understand and applaud your research and analysis before you went out, but I see as well their past (and I think future) strengths. For what it is worth - I plan to stay in based on the solid fundamentals (s. above) and the in my view very favorable future of the industry.

Discl: hold and intend to contribute to the CR, i.e. clearly - I am biased as you are Ah yes, and holding (larger chunks of) MFT and TRA as well.

[lorraina]

TRA and MFT.Great companies,however we must remember MFT stuffed up their first attempt at Aussie and also stuffed up their first European acquisition.Great company worked through them.
TRA.Well they really stuffed up their non recourse  Motor Trade Finance company loans,as they did their Autosure mechanical breakdown insurance charging the same rates for European cars as Japanese.Great company worked through them.
HGH.Was often said putting together two building societies with a finance company would never work.As for getting a NZ
Banking licence.Would never happen.Then throwing good money for a REL business whose major market was Australia was sheer madness.And yet here we are looking at getting an Australian Banking licence. Great company worked through them.
I wonder whether Forbar's target price of $1.25 or Craigs' of $1.51 is correct.
I am happy with either,as I will collect the fully imputated divie in the meantime.

[snapiti]

well I bailed as well, I suspect Jeff leaving is a good indicator that the "0ne off historical write downs" $15m are not going to be a "one off"
Also the caveats used when looking for possible escape goats why forecasts may not be met are more a reality than a possibility especially the one about unemployment increasing.
Also suspect underwriters are supporting the SP to keep retail investors interested in taking up the cap raise.
I am one of the lucky ones only losing 3 cps after factoring in the divi payment......suspect $1 will be tested

[winner (n)]

In their preso they mention Non-Strategic Assets and say they could realise $100m of capital.

Any idea what they are?

Harmoney stake? And other stuff

Whoops sounding like Oceania .....selling stuff to strengthen balançe sheet lol

[Waltzing]

T1 or T2 ...

Its the T2 SIR!!!

https://www.youtube.com/watch?v=74ztvm7nAg8

is this starting to look like a potential slow train wreck with this stock reverting to its inherited DNA?

The westpac backend at least lets them work on selling loans and not having to worry about tech ..

[lorraina]

HGH projections.From HGH presentation;
"Projections based on growth in Reverse Mortgages, Livestock Finance and Home Loans5 only.5 Home Loans acquired through the acquisition of Challenger Bank and is assumed to be in run-off. "
Therefore HGH have not counted on any motor vehicle or asset financing profits in their Australian projections.

Also;Lenders such as HGH,TRA, etc made a lot of loans when interest rates were very loan.
I watched a Turners presentation where their finance man Aaron,Saunders said it would take another 18 months to 2 years for these loans to be recycled.ie paid back in full and the money relent at new rates.
HGH mentions this in passing,but again I do not think the analysts have taken this into account.

I therefore think HGH will exceed their [in my opinion modest] projections.

[Basil]

No issues with loan demand, reverse mortgages have strong tailwinds and they enjoy a dominant market position.  21% CAGR in Australia in recent years speaks for itself as does the lower funding costs achieved through this process which I believe will top 2% per annum savings rate within 18 months.
Analysts seem to be about $175m for FY28 and predicting a 60-65% dividend payout ratio in future years and no further capital raise between now and FY28.

I think HGH would do well to radically change the discount level of their dividend reinvestment scheme, currently 2%.  Issuing new capital at an 18% discount to the last traded price in the manner they have, favoring institutions has really annoyed some retail investors, (and fair enough too), especially hard on the back of a $1.80 capital raise less than 2 years ago.  If they're so capital hungry maybe a 5% discount on the DRIP would encourage a larger uptake and more fairly reward those who choose to support the company with ongoing reinvestment   Certainly 5% is a lot less than 18% and that 18% was on a very depressed share price partly because the market was well aware a capital raise was coming.  I think there are serious lessons for the company to learn from this.  Perhaps I will make the effort to articulate my thoughts at the next annual meeting.

I suspect the analysts are slightly conservative with their forecast for FY28 but do note they see reducing the cost ratio to 35% as their hardest challenge and I tend to agree.  Still, sticking with what analyst coverage there currently is, (Jarden won't publish as they're the underwriters), $175m in FY28 on say 975m shares issued (including guess of DRIP shares issued between now and then), and assuming no more capital raises is eps of 18 cents per share.  Put a normal midpoint PE on that of about 13 and $2.34 seems like a plausible 4 year price target. 

Whether the company's target of $200m is right or the analysts $175m, I am more focused on the fact that this is probably the lowest point of the economic cycle and probably around the lowest point for the share price.  I think those that have sold here will come to regret their decision in the years ahead.

[snapiti]

hard to believe we are at the bottom of the economic cycle with unemployment set to continue to rise

[LoungeLizard]

Hehe - there's an old joke about how do you make God laugh? Tell him your plans.

Substitute "God" for "The Market" and that pretty much sums up much of the analysis.

[lorraina]

The first projection I heard Jeff Greenslade make was that HGH would increase their ROE from 4% to 10% in three years.
Think it was at their first AGM held in Ashburton many years ago.Yes achieved that.
As far as I am concerned HGH has achieved everything he said it would.
His record is better than any analyst's, .

 

[Shareguy]

In their preso they mention Non-Strategic Assets and say they could realise $100m of capital.

Any idea what they are?

Harmoney stake? And other stuff

Whoops sounding like Oceania .....selling stuff to strengthen balançe sheet lol

Apart from Harmoney, they have investment properties (VPS properties ltd) and other investments which I think makes up the difference.

[winner (n)]

Hehe - there's an old joke about how do you make God laugh? Tell him your plans.

Substitute "God" for "The Market" and that pretty much sums up much of the analysis.

But maybe it's a case of who laughs last laughs loudest

[winner (n)]

Hehe - there's an old joke about how do you make God laugh? Tell him your plans.

Substitute "God" for "The Market" and that pretty much sums up much of the analysis.

Hey LoungeLizard I every time I read your posts I think of Dan the weather guy on TV

Can't fathom why but it's a weird feeling

[LoungeLizard]

Hey LoungeLizard I every time I read your posts I think of Dan the weather guy on TV

Can't fathom why but it's a weird feeling

Hehe - fair enough, I'll take that

[lorraina]

Hey LoungeLizard I every time I read your posts I think of Dan the weather guy on TV

Can't fathom why but it's a weird feeling

How reliable are Dan's forecasts.?