HGH - Heartland Group Holdings

[Plata]

The bit about not maximising NIM to be socially responsible was good comedy (end of paragraph below). Regardless, happy to keep holding for long term growth story despite the tide going out short term.

"Rising interest rates in New Zealand and Australia have created a more challenging environment in which to manage margins. Heartland intentionally delayed passing the full impact of these increases onto some borrower customers, specifically in the case of New Zealand Reverse Mortgages and Australian Livestock Finance. While this did not maximise potential NIM, it was considered the socially responsible and more sustainable approach."

C'mon Mos don't ya feel good the benevolent executives used your money to help a few retirees live beyond their means?

[snapiti]

The bit about not maximising NIM to be socially responsible was good comedy (end of paragraph below). Regardless, happy to keep holding for long term growth story despite the tide going out short term.

"Rising interest rates in New Zealand and Australia have created a more challenging environment in which to manage margins. Heartland intentionally delayed passing the full impact of these increases onto some borrower customers, specifically in the case of New Zealand Reverse Mortgages and Australian Livestock Finance. While this did not maximise potential NIM, it was considered the socially responsible and more sustainable approach."

Always find the list of excuses attached to a downgrade fascinating ......somewhat surprised a bank would use the "socially responsible" card but I guess they had to add something given they obviously could not see the downturn the country has been in.....unfortunately commentary about how bright the future is nearly always comes after the downgrade excuses....IMO a fair amount of stench attach to the outlook commentary 

[Mos]

C'mon Mos don't ya feel good the benevolent executives used your money to help a few retirees live beyond their means?

I kind of do. But I feel I shouldn't.

[Greekwatchdog]

For Bar Review

Heartland Group (HGH) downgraded its FY24 underlying NPAT guidance -20% at the midpoint, a mix of short-term operational headwinds, costs relating to the purchase of Challenger Bank and additional provisioning. The negative 2023 September quarter New Zealand GDP print, released the same day as the guidance downgrade, underscores the risks for HGH in the face of a weakening consumer environment. Material potential upside remains in the form of lowering Australian borrowing costs when HGH completes its acquisition of Challenger Bank, though the uncertain path for the NZ consumer over the coming months leads us to maintain our NEUTRAL rating with a target price of NZ$1.70.

What's changed?



Earnings: FY24 lowered to within new guidance range, later years decreased due to lower forecast receivable growth
Target price: Lowered -15cps (-8%) to NZ$1.70.


NPAT downgrade a mixture of one-offs and ongoing challenges


New FY24 guidance is for underlying NPAT of between NZ$93m to NZ$97m compared to prior guidance of NZ$116m to NZ$122m. The key changes are: 1) the introduction of a NZ$11.5m provision linked to low quality legacy loans in the Motor and Asset Finance divisions, 2) a NZ$8m to NZ$10m negative impact from NIM compression and lower than expected receivable growth, and 3) -NZ$3.5m of expected operational losses from three months owning Challenger Bank. There is an additional -NZ$2.1m (after-tax) of one-off transaction costs relating to the Challenger Bank acquisition.

Modest lending rate increases and competitive deposit market squeezing NIM


HGH's conservative policy on hiking lending rates and increased competition in the deposit market, with competitors no longer having access to the RBNZ's Funding for Lending programme, is hurting its NIM. HGH has limited increases in its lending rates, particularly in its Reserve Mortgage and Livestock divisions, despite upwards pressure from rising deposit rates. NIM is also being suppressed by a decrease in churn in lower rate Motor loans. We forecast NIM to bottom in FY25 before rising as rates moderate.

Completion of Challenger Bank the key focus, timeline pushed back to March 2024


HGH's near-term priority remains the completion of the acquisition of Challenger Bank Australia. HGH had been hoping to receive regulatory approval before the end of 2023. It is taking longer than anticipated and the company is now targeting the end of 1Q CY24. The purchase would grant HGH a deposit takers license in Australia, enabling it to replace higher cost wholesale financing. How quickly HGH is able to lower its cost of funding then depends on the pace it can build its deposit book. HGH expects Challenger Bank to contribute a net NPAT loss of -NZ$3.5m in FY24 but breakeven in FY25.


Downgrade summary

Operational challenges (-NZ$8m–$10m NPAT impact): HGH has experienced a slowdown in receivable growth, particularly in the Motor and Australian Livestock divisions. The slowdown in Motor is linked to generally lower levels of consumer demand for vehicles and a delay in the purchase of vehicles due to the imminent reversal of the Clean Car Feebate scheme by the new coalition government in NZ. The low level of growth in Australian Livestock is due to adverse weather impacts. HGH has also experienced pressure on its NIM from a combination of higher deposit costs and its cautious approach when raising lending rates.
Legacy loan provisioning (-NZ$11.5m): The NZ$11.5m provision is split between Motor (NZ$7.5m) and Asset Finance (NZ$4.0m). HGH has a lower level of confidence in the collectability of legacy loans in this division. These loans pre-date HGH's shift to improve the quality of its loan book. Overall HGH's FY24 YTD annualised impairment expense is 0.35%, consistent with our forecast.
Challenger Bank acquisition (-NZ$3.5m): HGH expects to complete its acquisition of Challenger Bank by 31 March 2024. Challenger Bank is currently loss making and forecast to decrease HGH's NPAT by -NZ$3.5m in FY24, though it is expected to move to breakeven in FY25. In addition, one-off transaction costs incurred in FY24 are expected to amount to -NZ$2.1m.


Earnings revisions

Changes to FY24 earnings are material, though the one-off impacts of the economic provision and Challenger Bank acquisition costs do not flow through to future periods. We modestly reduce earnings expectations in future years due to the softer than expected receivable growth in the Motor and Australian Livestock books, as well as a lower NIM expectation.

inancials: Jun/   23A   24E   25E   26E
Rev (NZ$m)   n/a   n/a   n/a   n/a
NPAT* (NZ$m)   95.9   95.1   124.9   143.0
EPS* (NZc)   13.5   13.2   17.2   19.4
DPS (NZc)   11.5   11.5   12.0   12.5
Imputation (%)   100   100   100   100

*Based on normalised profits

[Shareguy]

Thanks for posting Greekwatchdog. DPS of 11.5 sounds very good FY24.

Challenger bank is forecast to be profitable FY26 as HB will be moving the reverse mortgage business and stockco into it.

Tomlinson thought the future was bright investing another $10m at $1.80 in the last cap raise.

[Basil]

This is a really material downgrade no question. Further to my comments yesterday it seems they can't get out of their own way with their myopic ESG focus.  If funding costs increase, lending rates should also increase to match...its been this way for hundreds of years with banks but HGH think they know better with their "social engineering".

They complain about softness with vehicle lending demand, but they won't lend on a major segment of the market, diesel vehicles because of their naive belief that diesel is dirty, and we need to make another loud,  meaningless and sanctimonious ESG statement.

So many items taken below the line it makes my head spin.  Even if you ignore all their creativity with all their extraordinary items and to be clear I think they should all be taken as normal expenses, (especially their under provision for bad and doubtful debts on motor vehicle loans)...but running with their highly creative approach and 13.5 cps normalized earnings, HGH closed yesterday at 11.5 times FY24 earnings.  (Really about 12.5 times real earnings).
Not very attractive relative to many of the lower risk Australian banks.

Looking further ahead if they can make those extraordinary eps numbers Forbar are forecasting for FY25 and FY26 then the shares are good value on a FY25 PE of only 9.  I guess it all comes down to whether you believe they can grow like that in a very soft economy despite them handicapping themselves with their ESG nonsense.  https://www.nzherald.co.nz/nz/gdp-fall-shock-finance-minister-nicola-willis-blames-economy-shrink-on-labour/SFP4BBYWWFAF7NQ7YMBNM3O6WE/

HGH predicting a good recovery next half.  Hmmm    From another paywalled Herald article on the recession.

It won't be easy. For many New Zealanders, the next six months will involve a trifecta of tough economic conditions - high interest rates, lingering high inflation and the job and business insecurity of a recession.

[winner (n)]

Not sure what this means but this bit in BusinessDesk sounds interesting -


So we took great interest in the end of rural services firm Elders' agreement with Bendigo and Adelaide Bank division Rural Bank, where the lender's services were offered through the Elders network.

  Rural Bank is paying Elders A$17m to end the deal, which the rural services firm said will free it up to offer a refreshed range of financial services to its customers.  That made us muse on Heartland's purchase of PGG Wrightson's finance arm all those years ago, and how the minnow bank has made ends meet in niches such as the rural sector.

  In fact, Heartland's purchase of StockCo last year gives it an ongoing livestock finance distribution relationship with Elders, and a spokesperson said the lender continues to work closely with the Australian rural services firm and discuss future opportunities as they arise.  A real stirrer might ponder as to whether that included financing a takeover of PGG Wrightson, of which Elders owns 12.3%, having lifted its stake in August.

[Red Baron]

Not sure what this means but this bit in BusinessDesk sounds interesting -

So we took great interest in the end of rural services firm Elders' agreement with Bendigo and Adelaide Bank division Rural Bank, where the lender's services were offered through the Elders network.

Rural Bank is paying Elders A$17m to end the deal, which the rural services firm said will free it up to offer a refreshed range of financial services to its customers.  That made us muse on Heartland's purchase of PGG Wrightson's finance arm all those years ago, and how the minnow bank has made ends meet in niches such as the rural sector.

On 31st August 2011 Heartland paid $100m vor "PGG Wrightson Finance."  Zis vas a vailure vor Heartland.  "PGG Wrightson" zubzequently ztrated up their own "GoLivestock" vinance arm, taking the cream vrom the old "PGG Wrightson Finance" business.  Does ze Heartland owned "PGG Wrightson Finance" ztill even exist?

Ze Heartland/ PGG Wrightson deal zounds analagous to ze Rural Bank / Elders deal.    Zo bad eez zees deal vor Rural Bank, zhat Rural Bank are paying Elders $A17m to end it!

"Elders the rural services firm said will free it up to offer a refreshed range of financial services to its customers."

Zounds like Elders have zeen how zuccessful 'GoLivestock' has been vor PGG Wrightson in New Zealand, and zhey are going to mimic such an arrangement in Australia?

In fact, Heartland's purchase of StockCo last year gives it an ongoing livestock finance distribution relationship with Elders, and a spokesperson said the lender continues to work closely with the Australian rural services firm and discuss future opportunities as they arise. 

Deed Heartland not learn their lesson vrom purchasing "PGG Wrighson Finance"?     It vill be interesting to see vhat 'special arrangement' (eef any) Elders zigns up to vith Stockco.    Zees has ze potential to not end vell vor Heartland, eef Elders .'go it alone' on 'vinancing een ze vuture'.

RB

[winner (n)]

Term Deposit 6.4% for 11 months

That's pretty keen

Still better to own the bank than put money in it eh

[Mos]

That is a pretty good rate Winner. At the moment I am sitting on the fence with investment in HGH shares and TD's. TD interest can be quite good for utilising excess imputation credits at the end of the tax year.

[Basil]

That is a pretty good rate Winner. At the moment I am sitting on the fence with investment in HGH shares and TD's. TD interest can be quite good for utilising excess imputation credits at the end of the tax year.

I'm right there with you on the fence.  Shares are on attractive metrics for FY25 IF they can make the 17 cents some brokers believe they can.  I have my doubts, plenty of them.  Yeap Winner, I got that reminder from them today about that special rate for 11 months and their 7 month rate which was 6.2% from memory.  Paying top dollar for those terms that's for sure but they don't want to pass on the costs to borrowers for ESG reasons.  Hmmm  Maybe they're aiming for
B Corp Certification next year ?

[Basil]

Jeff often has remarked that the prospects of HGH are tied in closely with the state of the economy.
I see the new Govt are forecasting on a per capita basis, (excluding the impact of new incoming migrants) we are forecast to be in a recession for the next 2 years.  Gosh that's very grim considering we've been in a recession for most of 2023 already even with record migration!
Doesn't give me any confidence when it comes to getting off the fence and getting back into HGH. 
I'm also mindful of a likely fairly significant sized capital raising coming to set up Challenger bank for commencing its operations and its probable effect on the share price and also the fact they will be dividend constrained for many years funding the capital requirements of Challenger as it grows.

[winner (n)]

Jeff says that 'tied to the economy' quite often and also mentions employment

But as you say it's not looking very rosy is it

Between the government's announcements & the Tsy's numbers, the fiscal outlook is now a bit worse than Nat's own pre-election plan ....and the worrying thing is that there's  no clarity on how things will be fixed.

Country stuffed for a few years

And Aussie economy not looking that bright for Heartland either

[Basil]

No doubt about it Winner, its going to take many years to try and fix some of the damage done by the Labour wrecking ball. 
Aussie in better shape not that our economy sets a high bar to beat does it !

[winner (n)]

No doubt about it Winner, its going to take many years to try and fix some of the damage done by the Labour wrecking ball. 
Aussie in better shape not that our economy sets a high bar to beat does it !

And a worry is that we can no longer rely on Jeff 'doing what we said we would do'

That mantra is no more