HGH - Heartland Group Holdings

[ValueNZ]

"It aint what you dont know that gets you into trouble, is what you know for sure that just aint so". Mark Twain

Don't buy shares in a downtrend, in the belief the market is wrong and you are right.

Nothing wrong with buying shares in a downtrend if there's a disproportionate impact on the share price compared to intrinsic value.

No clue about HGH though.

[Basil]

Bloody great call Beagle.

Good work sniffing that one out in advance

Thanks. Just keeping my nose to the ground and sniffing out what's a good feed and what's corporate B.S.

That seems insane. Are customers being charged significantly more for the vehicle to cover this risk? Minimoke

Gross recklessness and the answer is No, they're not charging more.

Some good discussion on the other channel today which is food for thought.  This post by Rawz stood out.

No Snoopy, take the rose tinted glasses off mate. This shocking result is a direct result of dumb products like Heartland extend and in general a very poor business writing strategy. They completely lost their way and forgot the fundamentals of asset finance lending. However it now looks like they have seen the light and changing their ways: 'Heartland Bank had historically taken a supportive and judgement-based approach to helping customers in arrears repay their loans..... As the economy has deteriorated and Heartland Bank has grown, its arrears management practices, while remaining supportive, require a more proactive and prescriptive approach. As a result, Heartland Bank has enhanced its collections, recoveries and write-offs strategies for its Motor Finance portfolio. Changes have included the adoption of a more prescriptive repossession policy. This sees Heartland Bank implement recovery action sooner in the collections cycle for customers in arrears unable or unwilling to work with Heartland Bank to develop corrective solutions. Recovery rate improvements are already flowing through'

There were warning signs 18 months ago that this day was coming. I posted a lot about Heartland extend and how it was covering up bad accounts. Also remember the crap story about the debt collections team being on holiday or sick leave etc....

Anyways, they have flagged another $8m in write offs and $5m of specific provisions if the economy doesnt pick up. I would say it is highly likely these are added in the 2nd half. Todays write offs only reduce non performing loans from 3.65% to 3.40%.. if you believe they wrote a whole bunch of bad historic loans, then you should conclude that there is still more crap on the books that will never be repaid

Not much of a reduction is it !  Plenty more pain to come.

[Basil]

Suggestions on the other channel that Heartland extend has been used to conceal delinquent loans for several years.  Amazing how the former CEO was able to predict the profit a full year ahead and get it right so many times to appear to "earn" his enormous bonus's each year.  It turns out that it could be the case that Heartland "extend" was used to manipulate the level of loan provisioning and the profit figure to whatever he wanted it to be.  Hmmm

If this was the case as has been alleged, and I think there's solid grounds for thinking this has been going on, the mind boggles as to where was the board in providing oversight on this and the auditors seemed to overlook this method of delinquent loan concealment as well?
Whatever is the case, I think there's truckloads more skeletons to come out of the closet.

Only the very foolish or naive would think ALL their problems are behind them now and its all onward and upward from here.

[winner (n)]

Hey Basil ....didn't they give the impression at 5he AGM that all 'bad' stuff had been provided for (in full?) ...but then Greg ran out of time lol

[Greekwatchdog]

For Bars review

Heading into Heartland Group's (HGH) 1H25 result we thought there were downside risks, but the pre-announcement of a ~-NZ$50m impairment charge and 1H25 NPAT guidance of NZ$2m–$5m was worse than expected. Significant impairments in motor and business lending are disappointing, especially given the known economic softness and the lack of further material deterioration in the economy since HGH's late-November 2024 update. Rising costs have also pressured profitability. This update has shaken market confidence in HGH, and rebuilding trust will take time. With its recent impairment track record and lending exposure to the soft NZ economy, risks remain skewed to the downside. Despite trading at ~8x 24-month forward PE, we retain NEUTRAL.

What's changed?



Earnings: Underlying NPAT down -53%/-28%/-16% over FY25/FY26/FY27 on increased opex and near-term impairment expenses
Target price: Reduced -15cps (-14%) to NZ$0.95 from NZ$1.10 given reduced earnings and dividend estimates.


The weak NZ economy may explain the impairments, but it was a known


HGH stated the impairments were due to the 'ongoing deterioration in economic conditions in NZ'. But 85% (NZ$35m) of the non-BAU impairments have come about since its last market update in late November 2024. While there is no doubt economic conditions in NZ have been soft, they have not dramatically weakened over the past two to three months and the economic downturn has been well known. The impairments raise concerns about HGH's systems and policies; concerns that cannot be erased overnight.

Opex looks to have stepped up and will stay higher


The other key driver of the weak 1H25 guidance relative to expectations appears to be higher costs. HGH's NZ bank reported to the RBNZ 1Q25 opex of NZ$30.5m, up +16% year-on-year. HGH stated that: (1) it is investing heavily to improve its collection processes, and (2) it expected costs to remain around these levels. We forecast total opex up +34% year-on-year for 1H25 and +31% for FY25.

More colour needed to provide the market with confidence in the earnings trajectory


The market's confidence in HGH is severely dented. To rebuild this, we believe it needs to: (1) provide more colour on the size and performance (non-performing loan ratio) of its legacy (pre-2020) book vs more recent lending—the latter will need to show better performance vs the former, (2) return to a more business-as-usual (BAU) impairment level, and (3) exit this period of elevated cost growth. We see it taking time for management to show this, and for the market to regain confidence in the growth story. However, once HGH is past the worst, we it expect it will re-rate upwards. Despite depressed valuation versus history, we retain NEUTRAL.


1H25 result preview

HGH's 1H25 NPAT guidance of NZ$2m–$5m implies PBT down ~-NZ$46m versus 1H25. HGH has indicated impairment expenses will be up +NZ$25.5m on 1H24, leaving the remaining ~NZ$20m to be explained by cost growth and/or net interest income declines, both a further negative from its update. HGH will report its 1H25 result on Thursday, 27 February. Our key focus areas are:

FY25 guidance: HGH has indicated it will provide NPAT guidance at its interim result. Following our downgrades, we forecast FY25 underlying NPAT of NZ$45m. Consensus prior to its announced impairments was ~NZ$103m.
Medium-term target: HGH has an ambition to achieve NZ$200m of underlying NPAT in FY28, we expect HGH to provide an update on this target at its 1H25 result. We see this target as unlikely to be achievable following its cost base increase. Our FY28 NPAT estimate is NZ$145m.
Net interest margins (NIM): HGH reiterated it expects to exit FY25 with a NIM of >4.0% at its late-November 2024 update. A reiteration of this would be a modest positive versus our expectations.
Cost base: We expect a strong step up in costs in 1H25 to NZ$89m, up +34% year-on-year and +31% versus 2H24. HGH will likely invest strongly into both its Australian and NZ banks. The market will welcome������� an indication of when cost growth will moderate again.
Dividend: We were surprised by HGH's indication that it still intends to pay an interim dividend following its impairment announcement. We decrease our estimate to NZ0.5cps for 1H25 and NZ2.5cps for FY25. While there is signalling value in the dividend, retaining capital in the business to help fund future growth (as opposed to raising equity) would be more prudent in the circumstances.

Earnings changes


We make material downgrades across our forecast horizon with a higher cost base being the largest driver of our medium-term downgrades. Increased impairment expenses in the near term exacerbate the FY25 and FY26 downgrades. We now forecast FY25 impairments of ~NZ$69m, slightly below HGH's indicated ~NZ$71m 'worst case' scenario, incorporating the majority of the further NZ$13m of impairments HGH indicated would be needed if conditions worsen in 2H25. We continue to forecast above BAU impairments in FY26 (~NZ$36m) before returning to a more normal expense in FY27. We also slightly moderate our NIM estimates.

[Basil]

Thanks for sharing. That's a damming review note.  Basically, a SELL.  Target price of 95 cents one year hence is basically 80 cents now given all the apparent risks and unknown risks and the time value of money. 

I was also concerned at the annual meeting about Leanne Lazurus's indications of cost increases.  Not sure if I articulated that properly in my post AGM review note.
 
Continuing to cling to their fanciful dream of $200m in FY28 does nothing to add to the credibility of the board or management, quite the opposite and shows they are not taking ownership of the size of the problems they face now or the operational weaknesses in their lending approval and collections systems.

[Otago K]

I am just now getting a feel for the numbers that were eluded to at AGM time, and still now don't feel given much insight to where the arrears under 180 days exactly sit, but maybe the next 6 months of the NZ economy might bite a bit more yet to where the analysts are quantifying this, 95c value by June might be a bit optimistic to me at the best end of my predictions at this stage. Having a bit of a think of the foresight on why the board structure may have been adopted, certainly rotten apples can affect the whole bin comes to mind, perhaps it was a somewhat wise move.
Disclosure left holding a minimal holding <1% of portfolio, wishing I had set a SP around a week ago at $1.08, think I will await what happens now.

[winner (n)]

The first red flag about how Heartland was going was when they had an 'abnormal' item of $17m being that fe-designation relating to hedging

At the analyst briefing they mumbled through what this really was....and gave the impression they really had no idea but the auditors made them do it

Been downhill since then

[Basil]

Can't help wondering if most or all subsequent write-downs have been also been at the behest of the auditors?

[mike2023]

Will this be a another sml opportunity at some point? And at what price?

[winner (n)]

Will this be a another sml opportunity at some point? And at what price?

You suggesting capital raise at 50 cents?

[Basil]

You suggesting capital raise at 50 cents?

They'll have to be careful not to do this too close to the pending OCA capital raise at that price lol

[mike2023]

You suggesting capital raise at 50 cents?

No I was thinking buy at 26 cents.

[BlackPeter]

Will this be a another sml opportunity at some point? And at what price?

Not enough CCP involvement - and actually, the interest drop might help them to crawl out of the hole they did dig for themselves.

People will have more money at hand to serve their distressed motor credits ...

[Cod]

TA suggests HGH will run down to 61c and loiter for a while, unless something else bad happens.

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