HGH - Heartland Group Holdings

[Mos]

Good update. Yes LEK RM 50% of assets and growing at 17% and 14% annualised rate in Australia and NZ respectively. RM's the low risk, high margin enduring growth engine - RM well placed to double in 5 years if HGH can sustain the momentum.

[Shareguy]

Yes I thought a good update with good progress on the NSA.

Disc/ I'm back in.

[LaserEyeKiwi]

Coverage from interest.co.nz:

"Heartland Group Holdings (HGH, #32) delivered a solid Q1 FY2026 result to 30 September, with improved profitability and ROE supported by expanding net interest margins, stable costs, and stronger asset quality in Motor Finance. Reverse Mortgages continued to grow strongly across both New Zealand and Australia, while subdued conditions weighed on other lending portfolios. Non‑strategic asset realisation accelerated, including the full exit of Harmoney and Alex Bank shareholdings, with total NSAs expected to fall to $179.5mln by year end, down -66.6% since June 2024. Heartland Bank's NPL ratio was steady at 3.22%, with underlying improvements excluding NSAs, while arrears in Business Finance rose but are expected to ease in Q2. In Australia, Reverse Mortgage receivables grew +17.2% in Q1, though Livestock Finance contracted seasonally. Heartland Bank Australia also repaid its final AU$100mln medium term note early in October, replacing it with lower‑cost deposit funding, which will weigh on Q2 results but deliver margin benefits in FY2027 and FY2028."

[winner (n)]

In spite of how wonderful things are going ROE reported 7.6% is still rather pathetic

Could say on track to 10% ....need $125m profit for that

[LaserEyeKiwi]

In spite of how wonderful things are going ROE reported 7.6% is still rather pathetic

Could say on track to 10% ....need $125m profit for that

Underlying RoE:

Q1: 5.6%
Q2: 6.1%
Q3: 7.6%

Going in the right direction.

[Mos]

In spite of how wonderful things are going ROE reported 7.6% is still rather pathetic

Could say on track to 10% ....need $125m profit for that

Agree Winner. That is where it is heading. 

[Greekwatchdog]

For Bars Review

Heartland Group (HGH) provided a solid 1Q26 update, slightly ahead of our expectations. Quarterly NPAT was ~28% of the bottom end of its reiterated FY26 guidance. There was a lot for investors to like in the update: opex in NZ appears under control; reverse mortgages in Australia and NZ continued to grow well; and it is making real progress on reducing its non-strategic assets, which could've proved troublesome. The key negative remains growing Business arrears. HGH expects these to moderate in 2Q26 and is confident in the low provision levels; we are more cautious. HGH appears to be past the worst, and we modestly increase our earnings estimates. It has re-rated to historic PE levels and ~1.1x NTA; a further re-rating will be harder. We estimate HGH can generate ~12% returns on tangible equity in the medium term, and with mid-single-digit NTA growth we see a modest premium to NTA as now fair. Retain NEUTRAL with an increased target price.

What's changed?



Earnings: Increased low-to-mid single digit on reduced opex and impairments.
Target price: Increased to NZ$1.10 (was $0.96) due to earnings upgrades and roll forward.


NZ bank delivering on opex control and non-strategic asset recovery


HGH's NZ bank reported a solid increase in profitability, NPAT of NZ$14m for 1Q26 versus NZ$11m in each of the prior quarters. The key highlights were: (1) lower opex, down sequentially and up just +3% year-on-year; we think this should allay some investors' concerns that opex was not under control; (2) impairments in its Motor and Rural book remain close to business-as-usual levels; and (3) its non-strategic asset realisation programme delivered solid results, with more expected to be realised in early 2Q26.

Reverse mortgage growth remains robust, but the rest of its lending is in decline—arguably both positives


Reverse mortgages across both Australia and NZ reported quarterly growth in line with prior run-rates. Demand remains robust, although there is an increase in Australian opex to meet the lift in onboarding demand. Motor receivables continue to decline, with its pivot to higher-quality distribution channels yielding fewer new loans but should deliver higher returns. Business lending fell >-6% in 1Q26; we see this as a positive, given the segment generates the lowest returns on equity (comfortably below cost of capital).

Motor arrears improving but Business arrears deteriorating


We are gaining confidence that large 1H25 Motor arrears were a one-off, with Motor arrears steadily decreasing since 1H25, including in the >180 days past-due category, and recoveries have been solid. However, Business arrears continue to grow in absolute terms despite a reduction in lending. Since FY24, Business non-performing loans (NPL) have grown +45%; HGH expects to see a reduction in 2Q26, but we remain cautious. Australian rural arrears have increased, with the NPL ratio rising from ~20% to ~30%.

Earnings changes

We slightly increase our earnings estimates, reflecting: (1) lower NZ opex; (2) lower Motor impairments; and (3) lower net interest income; these are partially offset by increased Australian bank opex.

[Plata]

I wonder if the wobbles being experienced in US regional banking will have any impact here. I think they are making the right choice focusing on quality in the motor lending division.

[Basil]

Interesting post by Muse on the other channel, quoted below.  I agree with almost all the points he has made, which are very well articulated in my opinion.
Highlighting his concerns
The number of shares on issue in the last 5 years and eps each year, from Jarden website is as follows
2021 599.7m eps 15 cps
2022 606.8m eps 16 cps
2023 726.3m eps 14 cps
2024 930.6m eps 10 cps
2025 940.1m eps 4 cps
Off Market Screener average of 3 analysts forecast eps in the next 2 years is as follows
2026 9.1 cps
2027 11.4 cps.
Average eps last 5 years, historical 11.8 cps
Average eps last 8 years + 2 years forecast ahead = 11.6 EPS right across the economic cycles for a decade.

It seems clear to me Heartland will need to keep raising significant amounts of capital with discounted rights issues in the years ahead to fund their cash operational burn.  Its also clear to me, (I am sure others will disagree and that's fine), that on an earnings per share basis HGH is definitely not a growth company.

One also needs to consider that earnings forecast of 11.4 cps for FY27 is not the same as the 12 cps they earned in 2018, there's 9 years of inflation to account for and in just the last 5 years its totaled 23%, (source RBNZ inflation calculator), so earnings per share in real terms will be more than 30% lower based on FY27's forecast to what they were in 2018 ! 

My valuation.  Including the forecast period their 10 year average eps is 11.6 cps.  I put a no growth Ben Graham PE of 8.5 on that and get fair value of 98.6 cps.  I note the average broker forecast 12 months hence is $1.03 which suggests a spot valuation today right in line with where I see fair value. 

One thing that has really changed in recent years relative to to the past is the significant deterioration in Heartland's cashflow profile. Yes reverse mortgages are capital intensive (interest income is capitalised to receivables rather than received in cash whereas Heartland's funding expense is paid in cold hard cash) but historically there always used to be enough cash income to more than cover keeping the lights on (ie covering its cash operating costs, capex, and cash tax).

Case in point.

Pluck out from the profit and loss reported interest income and interest expense - giving you 'reported' NIM. Then from the cashflow statement pluck out the cash interest income received and cash interest paid - giving you 'cash' NIM. 'Cash NIM' as a % of 'reported NIM' is troubling - from FY20 to FY25 it has gone 65.2%, 63.5%, 48.9%, 49.7%, 38.0%, to 12.6% in the last financial year (the big 4 banks are all at ~100%) - gulp. Heartland reported $307.2m in NIM in its profit and loss - but only received $38.7m of NIM in actual cash.

As a thought experiment lets tack on all the other cash fee income and cash opex, capex and tax bits to see how well the business is treading water before even contemplating how they fund growing the RM receivables, pay dividends, or other 'extraordinary' expenses.

To cash NIM add cash fees and cash lease income which gets you to a cash version Heartland's operating net margin. Then less its cash opex (ie underlying opex per the accounts adding back all the non cash expenses like D&A and share issues expenses - and I used underlying opex to exclude all the M&A transaction costs as I just wanted to see its core operating expenses), less net cash leases, less capex, less cash taxes.

I reckon this is a very fair way to look at Heartland's 'keep the lights on' cashflow profile. From FY20 to FY25 Heartland's 'core' cashflow went from +$35.2m, +$23.4m, ($17.0m), ($41.3m), ($65.1m), to ($145.6m) in the last financial year (parenthesis are negative values!!). Even though Heartland's core cashflows have never been enough to cover the dividend (in these 5 years anyway) they have continued to pay them. Including dividends I think there is +$500m of embedded corporate debt on Heartland's balance sheet that has been drawn not to fund receivables but to fund its core cashflow deficits and dividends. Even more when you include all the substantial M&A and capital raising fees paid over the years.

Banking is weird you can raise deposits to fund all this stuff and show positive earnings.

First, raising deposits (or wholsesale funding) to cover core operating losses leaves a bad taste in my mouth. A few years ago at least they had enough cold hard cash lending to underwrite its opex, capex, and tax but that really changed in FY24 and FY25.

Second, I struggle to get comfortable with the long-term implications from this. Sure they can raise deposits to cover these losses, but then presumably they are raising interest bearing liabilities that aren't being put to work in new lending - wouldn't this start to eat into NIM% at some point? And I get the wobbles when I think about liquidity coverage challenges (core funding ratios and mismatch ratios) - when keeping the lights on burns cash and you are constantly raising new deposits to fund that as well as to funding all the term deposit maturities - just seems like a dynamic that will pose challenges at some point.

Third, institutions will (or should) be aware of this and start to perpetually ascribe Heartland a 'cum capital raising' valuation. We all know how NZX investors drive the price down in anticipation of a capital raising and you really don't want that to become a permanent fixture of how the market values you. If you look closely at the sources and uses of the capital raised in their last few cap raising presentations you'll see a meaningful amount of the capital raised was used as a cash buffer, over and above what was strictly required for the acquisition or AU statutory banking requirements.

Cynically I've observed the mad dash to sell down any and all asset for cash and divest less profitable books for cash, which sorta coincides with this period but of course it is also an attempt to repair Heartland's credibility.

None of this is meant to be alarming - I see that Fitch on the 20th of October reaffirmed Heartland's credit rating - and I know the banks will have all sorts of tremendously sophisticated cashflow monitoring and forecasting systems in place to manage all this. And the RBNZ bank dashboard shows Heartland's liquidity ratios to all be in good nick relative to the big 4 banks as at 30 June 2025.

But yeah nah after seeing that drop in cashflow profile I'm just not interested in investing in Heartland again, despite what looks to be an uptrend and hopefully start of an economic recovery. For those that did invest at the bottom well done, but as a long term investor this one just isn't for me anymore. That and not enough heads have rolled at Heartland over the last few years. They were totally over committed to the capital raising to acquire that Aussie business in the face of a heavily depressed (and no doubt suppressed) share price, when I reckon existing investors at time would have been much better off not proceeding given the huge dilution. StockCo was purchased for way too much and never delivered on what HGH said it would do. Impairments rocketed above expectations and look quite rooky in retrospect. There are too many people left in the company and on the Board that were involved with these sins for my liking. I reckon they have lost any mandate to undertake any more acquisitions or expansionary capital raisings.

The other irritating thing is how poorly NIM in Australia has tracked. It looks like has plateaued with the company guiding FY26 ave NIM of 3.4% - about the same as 2H FY25 (despite more deposits being raised)...but that compares to an average of ~3.4% in Heartland Australia between FY19 and FY23. So all the hype about how much cheaper the cost of funds were and how positive it would be for NIM% at the time of the equity raise, has gone straight out the window...either the competitors have dropped pricing and so have heartland, or heartland is competing it away to grow the book faster.

All in my own opinion - and certainly do your own research. No doubt the SP will keep rocketing up right after I post this but whatever....more ETFs for me.

[Shareguy]

Great post Muse and Basil. Always good to get others views. The main reason I got back in was they are making good progress finally on the NSA.

By the end of the 2025 calendar year (CY2025), Heartland estimates the total value of NSAs to be $179.5 million, a $358.1 million (-66.6%) reduction since 30 June 2024.

The Australian NIM is down and they mention full pass on of OCR cuts to reverse mortgages. As Muse has pointed out they were going on about the banks cost of money going down so why is it low?

Yes when you look back on EPS performance it's not good. I'm banking on the fact that this time it's different. Will be waiting for the investor day for signs. I think a lot of the SP growth is the current melt up chasing yields as deposit rates decline. With another cut coming and bottom of cycle I'm expecting the SP to continue to increase.

[winner (n)]

Talking of EPS here's a chart of the past and future

Somebody once said "When we have reached the depths of despair, only then can we look up and see the light of hope,"

That light of hope leading to greatness

You cannot view this attachment.

[Left Field]

Talking of EPS here's a chart of the past and future

Somebody once said "When we have reached the depths of despair, only then can we look up and see the light of hope,"

That light of hope leading to greatness

Some might say the 1 year TA is looking a tab auspicious too...... those that like 'gap theory' will be pleased to see the historic gap around $1.00 seems to have been filled and  more good news in the next update is likely to see the SP continue to climb. Time will tell. Those that climbed into HGH around the $0.80 mark have done well (so far)

[Greekwatchdog]

Talking of EPS here's a chart of the past and future

Somebody once said "When we have reached the depths of despair, only then can we look up and see the light of hope,"

That light of hope leading to greatness

You cannot view this attachment.

2 painful Cap Raises certainly show on that graph combined with Management dodgy loaning that finally showed up in the results.

Those who bought in under $1 and trusted their research have certainly done well.

[Basil]

I'm banking on the fact that this time it's different

That's arguably the most dangerous phrase in the investor lexicon.

"When we have reached the depths of despair, only then can we look up and see the light of hope,"
That light of hope leading to greatness

Said on a Sunday morning and sounds remarkably like something you'd hear a preacher say from the pulpit on a Sunday.

[LaserEyeKiwi]

That's arguably the most dangerous phrase in the investor lexicon.
Said on a Sunday morning and sounds remarkably like something you'd hear a preacher say from the pulpit on a Sunday.

To be fair, the new management is running things differently:

- Immediately recognized more realistic impairments
- tightened up auto lending, now has better than industry average NPLs
- cuts dividend payout ratio to 50%, to allow more capital to remain in the business for growth (including all that is generated in Australia stays in Australia for growth)
- Immediately refocused business (getting out of low margin traditional Home Loans) and started winding up non-core assets, again to release capital for growth of core products.