HGH - Heartland Group Holdings

[BlackPeter]

Basil, cheers for your report - and cheers for attending the AGM and asking relevant questions. Consider yourself lucky - I asked an online question and only got back that they will respond to that question later in email (here is hoping ...).

Nevertheless, as indicated - my impression of the meeting was a bit better than yours, I saw a new team trying to fix the issues of the past, but I can see the issues you are worried about. And sure - them just acknowledging them does not mean that they will succeed in resolving them as well. Talk is cheap.

No matter whether one considers the stock currently as NSA - or otherwise, I would I expect that their margin will go up in the mid term with interest rates going down. That's what happens, if you've got a captive clientele (on fixed term interest) as borrowers and are able to lend the money you need for lending to them with dropping interest rates at a lower price.

What I am saying is, I expect their EPS to go up in the midterm and sort of expect the SP to follow, unless the reserve banks of the world do a turnaround  ... and plan to earmark their shares for review to sell (together with various real estate stocks) when the interest rates start to approach the next bottom.

Anyway - good info, cheers.

[Basil]

Some further reflections from yesterday's meeting while they are still fresh in my mind.
In no particular order I recall
1.The banking system computer upgrade will result in an additional depreciation charge of ~ $6m per annum and that's quite a headwind for future profits.
2. Leanne Lazurus said company and business insolvencies had increased in FY25 to date compared to last year
3. She also said that Heartland N.Z. costs had increased year on year, (this despite my recollection of a substantial jump in the cost to income ratio (CTI) in FY24.  Comment:- This simply doesn't fit with their goal of reducing CTI to 35% by FY28 and increasingly in my opinion their FY28 targets, (all of them) look like pie in the sky aspirational targets that are simply not achievable)
4. She also said she expects the unemployment rate to continue to increase in FY25.  Comment: As do almost all economists.  She also told me after the meeting that their default loss rate on motor vehicle lending was circa 2% and she expected that would increase.  I encouraged her to do the minimum possible no deposit lending as vehicles depreciate circa 25-30% the minute they are driven off the car lot but she said the practice was endemic in the industry.
5. Greg Tomlinson acknowledged to me after the meeting they had done "Too many capital raises".  Comment.  I think its very unlikely there will be another one anytime soon.
6. Its clear they are targeting a 55% dividend rate or close to that level.
7. There was a lot of talk about the 2% extra margin they would get on reverse home loan lending in Australia and they acknowledged to me after the meeting that their intention was not to pass any of this saving onto the customers.  Comment.  They really accentuated the positive but there was no talk about the extra staff costs in Australia.

Taking into account clear indications of significant extra costs in FY25 and extra bad and doubtful debts I think normalized profit will be somewhat lower in FY25 than FY24.  Taking into account all the extra shares on issue of just over 956m I think eps will be about 10 cps in FY25, less any losses on the bad bank.  With a 55% targeted divvy payout ratio I think another dividend cut is very much on the cards, indeed there was mention in the meeting of 6 cps in passing, at one point.  It could even be as low as 5.5 cps.  This simply doesn't fit with my earlier expectations of 7 cps and really undermines the investment case for holding as far as I am concerned.  Frankly, you can get better yield elsewhere.

My preliminary revised view of earnings growth in FY26 and FY27 is this will be substantially obliterated by heavy losses on their $217.9m bad bank.  It would not surprise me in the slightest if they only got somewhere around 50 cents on the dollar for the assets in that bad bank.  Perhaps as much as $120m in losses to come spread over a number of years is how I see it.  That's just a guess on my part but a lot of those business loans are secured over plant and equipment that's simply not sellable in this market and might only attract very lowball offers in the future.  (For example, a client of mine recently sold a heavy trailer unit through Turners in good working order.  He was told there's such a vast amount of plant and equipment on the market they would only take it to auction if it was no reserve.  It was surplus to his requirements, and he only got just on 5 cents on the dollar of depreciated book value)  Comment. Its a real bloodbath environment out there for selling construction equipment, there are literally so few buyers, they offer mere cents on the dollar.

Additionally, although they are absolutely adamant that no further delinquent loans in FY25 will be added to the bad bank, transferring another tranche of especially problematic assets in there this year, would not surprise me in the slightest.

Its not hard at all to find better managed companies than HGH so I completed the sell down of my remaining shares today.

I acknowledge Lounge Lizard was right, owning a small bank at this stage of the economic cycle is not a good idea.  The length and depth of the recession, (which I am insulated from), and its effects on their receivables is something that I believe has really surprised HGH and also surprised me.

There's a very long road ahead, many years, for management to build credibility and earnings growth back and I don't have the patience for that.   No investor on this planet gets every decision right so I am philosophical. I completed my exit at very close to break even counting back in the last 2 dividends I've received.  If you can recover from the odd poor decision at break even on cost or very close, that's a cheap and valuable lesson.

Good luck to holders, I think you are going to need it.    My Beagle nose for corporate B.S. and double speak, registered a very high reading yesterday.

[Shareguy]

Watched the agm and was disappointed that no guidance was issued. My take on that is FY25 has not started well. The comments that Nim to date has increased is good, and the comments re retail deposits in Australia exceeding expectations is another positive. However the comments from the NZ ceo that business liquidations are high. With increased unemployment and concerns re the non strategic assets and future impairments leave me with the impression that FY25 is going to be tough, very tough.

Pleased to hear that part of my question was answered re non strategic assets . The chair confirmed that valuation's were undertaken by third partys. The NZ ceo did mention that they were waiting for farm values to improve which is the bulk at $114m.

Craig's note says that retail deposits raised so far are at an average rate that is 1.74% lower than HGH's current average cost of funds in Australia. If this cost of funds differential remains we think it should underpin at least a c$30m improvement in NPAT between FY24 and FY26. This is a game changer if it happens.

$30m is a big number but this will not happen straight away and will be spread out with 90 percent in retail funds by the end of FY25.  Craig's note states it expects 1H25 to be similar to 2H24.

Over all I think a lot is riding on an improved economy but I personally think that the new ceos will want to start with a fresh slate so FY25 is going to be possibly another tough year and perhaps even less NPAT than FY24.

FY24 actual adjusted NPAT was $87.9 m

Latest forecasts from brokers.

Jardens $105m eps 11.2
Craig's $103m eps 11.0
Fbar    $102m eps 10.8

Note. All brokers expecting higher NPAT in FY25 but lower EPS Due to the cap raise (increase in shares)

A lot of these non strategic assets have been on the disposal list for some time so I think it's valid to conclude that further write downs and impairments are a real possibility. The chair did say there was going to be no fire sales but I believe until we see some resolution that the share price is going to stay in the doldrums.

On saying all this I see the prize being Australia and with the share price being below asset value and with declining interest rates still think at around the dollar is good value. I'm going to hold but can understand traders/investors selling out or reducing positions. All brokers are forecasting big increases FY26 onwards which is what I'm holding out for.

Big congrats to Basil for going to the meeting and his take on things and for fantastic questions asked.

[LoungeLizard]

Cheers Basil for the time and effort taken in exposing HGH's particular brand of corporate B.S.

 The continued lack of guidance speaks volumes about just how uncertain HGH are about "what lies beneath" their own business and indeed, the economic backdrop they are working under. Trying to re-assure investors that things will all be good in 2028, without knowing how the business is going right now, is treating shareholders like idiots. There is, to my mind,  a huge credibility and trust gap between shareholders and management, and really - who needs to put up with that when there's much better run companies, with much better prospects, to invest in?

My feeling too, is that the dividend will be cut further, and I don't see any movement upwards in the SP in the medium term. There's obviously still a few that are keeping the faith, so good luck to all.

[winner (n)]

Interesting chart shows what happens when a company becomes slack and looses its way ....from the top down.

Now we don't believe in the normalisation thing these are real reported NPAT numbers and weighted average number of shares.

If F24 NPAT is another $75m year EPS and we use the number of shares including last capital raise EPS will continue its downward slide to 8 cents (half of a few years ago)

No wonder share price is where it is today .....and not surprising sone really disillusioned shareholders are getting out

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[BlackPeter]

Great discussion - stocktalk at its finest.

Cheers basil for your very useful report and your effort in communicating your concerns loud and clear. I do think that the scenario you paint is close to worst case, but absolutely - if our economies keep stuck at the current bottom for the next three years, than I think you nailed it.

From a personal perspective I expect all major economies to pick up ... with a turning point around now (well, some - like US - are already quite nicely on the uptrend), and this would mean that the value in their bad bank would rise as well in proportion.

So - lets say worst case - they stick for some time around with their 10 cents EPS.

Best case would be in my view their project 2028 (and yes, I say best case, not most likely case), which would mean something like 20 cents EPS (in 2028).

From experience - most things end up somewhere between worst and best case, so lets say something like 15 cents EPS in 2028 would be middle of the road. Not stellar (for a share which used to be above $2), but not bad either for a share you currently can buy around $1.

Ah yes, and then there is this dropping interest rate effect I mentioned in an earlier post. Interest rates down means inevitably higher lending margins for lenders with a captive clientele. As well - interest rates down means higher stock prices for dividend payers, even if they don't raise their dividend (obviously only if they don't drop their dividends). Win - win.

I stick in this discussion with shareguy ... and will keep my holding - but yes, I reinvested recently some free cash, and no, this money didn't went into additional HGH shares, i.e. I rate them currently as HOLD, not as BUY.

[snapiti]

thanks winner, SP also reflected in your chart, shows what happens to a company with solid growth when that stops.
Interesting Beagle you raised the 100% lending on cars issue and the company says that is the norm for the industry.......I see it as reckless lending.....surely during this economic down turn some form of caution should have been applied.
From the sounds of it they still practice the same sort of lending.
To me it also looks like their rural lending book is in real trouble, as they have to wait for rural farm prices to rise before being in a position to recover debt.
Still not the worst investment at current levels, in saying that happy to be on the sidelines as I believe there is more pain to come especially with rising unemployment 

[winner (n)]

Headlines of last two years results announcements -

Heartland announces solid FY2024 result
Heartland's FY2023 result demonstrates resilience

So all good

[snapiti]

Headlines of last two years results announcements -

Heartland announces solid FY2024 result
Heartland's FY2023 result demonstrates resilience

So all good

interesting.... I wonder what one could say about the share price over the same corresponding periods

[BlackPeter]

thanks winner, SP also reflected in your chart, shows what happens to a company with solid growth when that stops.
Interesting Beagle you raised the 100% lending on cars issue and the company says that is the norm for the industry.......I see it as reckless lending.....surely during this economic down turn some form of caution should have been applied.
From the sounds of it they still practice the same sort of lending.
To me it also looks like their rural lending book is in real trouble, as they have to wait for rural farm prices to rise before being in a position to recover debt.
Still not the worst investment at current levels, in saying that happy to be on the sidelines as I believe there is more pain to come especially with rising unemployment 

Just on the subject on rural farm prices. Man in radio (Radio NZ, I think in the rural report) said this morning that dairy farm prices increased by 20% over the last 12 months. Green shoots?

[raW tent Buffer]

Is there a recording of the meeting anywhere? I cannot find it on their website and would like to view the Q&A section. I had to check out halfway through due to work commitments.

I'm still holding but with some trepidation. From what I heard I still have some optimism about the Aussie RM side of things but that's about it.

[Red Baron]

Cheers basil for your very useful report and your effort in communicating your concerns loud and clear. I do think that the scenario you paint is close to worst case, but absolutely - if our economies keep stuck at the current bottom for the next three years, than I think you nailed it.

Een case you have not noticed, Basil has a tendency to gravitate towards ze vorst case zcenario.    Zees eez not meant to be a criticism of Basil.  Eet eez just a recognition of heez investment style.  Zniff trouble and get out early, vhich leaves you vith ze problem of vhat to do vith your money.  OK for zome but an investment ztyle zhat leaves you in a constant state of nervousness - zo not vor me.

From a personal perspective I expect all major economies to pick up ... with a turning point around now (well, some - like US - are already quite nicely on the uptrend), and this would mean that the value in their bad bank would rise as well in proportion.

So - lets say worst case - they stick for some time around with their 10 cents EPS.

Best case would be in my view their project 2028 (and yes, I say best case, not most likely case), which would mean something like 20 cents EPS (in 2028).

From experience - most things end up somewhere between worst and best case, so lets say something like 15 cents EPS in 2028 would be middle of the road. Not stellar (for a share which used to be above $2), but not bad either for a share you currently can buy around $1.

Ah yes, and then there is this dropping interest rate effect I mentioned in an earlier post. Interest rates down means inevitably higher lending margins for lenders with a captive clientele. As well - interest rates down means higher stock prices for dividend payers, even if they don't raise their dividend (obviously only if they don't drop their dividends). Win - win.

I stick in this discussion with shareguy ... and will keep my holding - but yes, I reinvested recently some free cash, and no, this money didn't went into additional HGH shares, i.e. I rate them currently as HOLD, not as BUY.

Vifteen cps earnings vor FY2028?    Dividend of 7.5cps, on a zhare price of $1.02?  Gives a 'gross dividend yield' of 10.2%.    How vill zhat compare vith 'bank term deposit rates' een 2028?

Ze golden goose vor Heartland has been vor a vhile 'Reverse Mortgages':  A business niche too specialized to be invaded by ze 'big banks'.    Zees eez vhy ve chose to invest in Heartland over and above zhose other 'zcrappy zecond tier lenders', let us not vorget!

'Asset financing', ze zecond Heartland gig, vas always going to be hit hard in a recession.  Granted zees recession eez turning out to be deeper and longer than zome predicted.  But I do not theenk Heartand investors zhould act zurprised by zhis, and ze consequent headwinds zhat Heartland could, -and now are- vacing..  I agree zhat Heartland risk management on 'asset lending' has turned out var vrom optimal.   But zees eez easy to zay vith ze benefit of hindsight.  Heartland vill be learning from zhis experience and vill survive to bank another day. 

If theengs do go down 'the middle of the road', zhen Heartand eez zet to become 'a very boring investment', vhich zuits me just vine.   I theenk your overview heets ze right balance Blackpeter.

RB

[850man]

I'd be out if I wasn't an embarrassing 25% underwater with HGH. If I realise the loss, what's there to put it in to recoup? The whole NZ market is not flash right now.

[winner (n)]

Headlines of last two years results announcements -

Heartland announces solid FY2024 result
Heartland's FY2023 result demonstrates resilience

So all good

Solid FY2024 result they headlined.

They never made any mention that H1 NPAT was down ~25% on pcp and H2 NPAT was down ~22% on pcp ...and not much said by media/market watchers

That's some drop in profitability

[LoungeLizard]

Solid FY2024 result they headlined.

They never made any mention that H1 NPAT was down ~25% on pcp and H2 NPAT was down ~22% on pcp ...and not much said by media/market watchers

That's some drop in profitability

Actually, as it seemed to me at the time, the result was bad from just about every angle you could think of : NP down, debt up, EPS down, NIM down, CTI up, impairments up and to top it off the final dividend was cut by 50%. If that was solid result I'd hate to see a bad one.