HGH - Heartland Group Holdings

[Ferg]

Aren't all ze derivatives 'marked to market' on ze balance sheet at balance date, as market eenterest vrates change (i.e. are revalued by ze market)?

The answer depends on the effectiveness of the hedge.  Ineffective hedges are put through the P&L whereas effective hedges (that qualify for hedge accounting) go through the Balance Sheet / Cash Flow Reserve account.

Trust me - this is not an area worth spending any time on.  Experts could debate this for hours but I have neither the interest or expertise.  But you can glean a view of future gains or losses depending on the reserve balance at a point in time, assuming the hedges are closed out at those same rates.  The only thing we need to worry about are bonehead decisions like taking a US denominated fixed rate loan and using various instruments to convert it to NZD floating (I'm looking at you Ryman).

Info here: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_9_effectiven_US/92_introduction_to_e_US.html#pwc-topic.dita_1807123004126092

[snapiti]

been on my dividend portfolio watch list for over a year now but I suspected the current macro environment would eventually catch up and give me a better entry point, only issue here is the poor macro environment still has a ways to go and me thinks so one could easily get burnt diving in to early.......shall start to purchase @ $1.35 but get the feeling that there will be better buying in a few months time.

[Basil]

been on my dividend portfolio watch list for over a year now but I suspected the current macro environment would eventually catch up and give me a better entry point, only issue here is the poor macro environment still has a ways to go and me thinks so one could easily get burnt diving in to early.......shall start to purchase @ $1.35 but get the feeling that there will be better buying in a few months time.

Agree 100% but just watch the TA, the chart will tell you when a bottom has formed.  Logn way to go with the recession in N.Z. and now the RBNZ is given the monocular focus of inflation, you can bet Orr keeps rates higher for longer, (is FAR too slow to bring them down), and there are more serious risks to unemployment rising that the Treasury are currently forecasting. 

I backed up the truck a few years ago at $1.30 when the chart said "go".  I think there's a very good chance of the same price level happening again.   The question in my mind this time though is, will ~ $1.30 be the bottom ?

[Shareguy]

Some interesting reading for those interested.

https://www.bankingday.com/challenger-red-faced-once-more-in-banking

https://www.reuters.com/markets/commodities/australian-sheep-cattle-prices-slump-el-nino-scorches-pastures-2023-11-29/

https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/livestock-prices#falling-livestock-prices-reflect-higher-animal-supply

https://www.aa.co.nz/cars/the-indicator/

https://www.businessinsider.com/stock-market-crash-sp500-outlook-returns-inflation-spi-valuations-smead-2023-12

[Basil]

Just some extra thoughts I had this morning on this one for 2024 and beyond that came to mind while out walking my dog.  Also mulling over the prospects for the long term outlook for the rest of this decade.  There are no guarantees that even if they get the necessary regulatory approvals with the Challenger bank and do the necessary capital raise, that it will be immediately or even in the short term, eps and almost certainly not dps accretive to the company. 

It takes lots of time and money to build a brand and whilst it's acknowledged that the Australian authorities have a government guarantee on retail term deposits to a certain level, from vague memory its $250K over there, that doesn't automatically follow that they will build their retail depositor base without substantial investment over time not just in marketing but in systems and human resources also.  In addition, I think they could be dividend constrained for quite some years as they need to meet minimum Australian mandated capital requirements.

I'm not suggesting in the medium to long term it's a bad idea, just its impact on eps and dps in the short - medium term, perhaps for as long as the rest of this decade might not be an ideal fit for what some are wanting from their investment.  For now, I see HGH as a trader's stock.  There will probably be a time to buy it at some stage in 2024, and probably a time to sell it at some stage in 2025 or 2026.   I looked this up. 10 years ago HGH were $1.59.  There's been some very profitable opportunities to buy and sell it over the years, and some have very skillfully taken advantage of those but buy and hold hasn't worked very well in the last decade and I think trading it will give better returns in the next decade than buy and hold.. 

Frankly, I really believe the board have lost their way with their excessive focus on all things ESG and Jeff is too ambitious. My level of confidence in the board and management is best described as low. It occurred to me this morning that if they took a more commercial approach with lending and maintaining margins and just let the business grow organically as it was, the dividend growth profile over the rest of this decade could have looked a heck of a lot more attractive than how I presently perceive it.    No doubt others will be investing for the benefits Challenger bank will hopefully provide in the medium to long term and I get that, but caution that eps growth is not an absolute certainty.

Another thought was this. Whether shareholders like to admit it or not, a LOT of HGH's lending fits the standard M.O. of a finance company and frankly, I can't see any reason at all to prefer this over Turners, unless this is on really dirt-cheap metrics and then only as a trade.  Reflecting on this, I don't have anywhere remotely near the same level of confidence they can grow eps and dps in the same way TRA can for the rest of this decade and they're on quite similar metrics so why bother with this unless its screaming cheap?  Buy and hold for Turners, yes absolutely but not for this, its buy at the bottom and sell when the time is right.  I'm not going to diversify just for the sake of it either...I'd rather simply have more in a company whose management I have full confidence in.  Others will no doubt see it differently and that's perfectly fine.

That's all that came to mind today.  Best wishes for 2024 folks.

[Shareguy]

The Challenger bank if it proceeds will be material with potential upside in lower borrowing costs.

Will be first for a NZ bank in Australia and I'm thinking that when and if the announcement is made that the share price will re rate.

For long term holders the dividend has been consistently good. I have already had more in dividends than the original purchase price.  If you look at the share price of $1.45 Fbar in latest note have FY24 EPS of $0.135 and DPS of $.115 which is a fcast PE of 10.7.

Of course there is the prospect of a cap raise but I for one think at the current price it's good buying.

I emailed the CEO just before Xmas about the prospect of a CR and got a quick response saying

"Heartland carefully considers all options to strengthen its balance sheet. The Board's underlying objective is to increase shareholder value. Regarding any capital which may be required to support the proposed acquisition of Challenger Bank, Heartland is considering a number of options."

I do agree that in the short term the divi could well be constrained but I'm sure long term holders will continue to do well and you don't have the tax implications that traders have.

Our Jeff has stated his ambition to double underlying NPAT within 5 years. Sounds good to me.


Disc, have been adding.

[SCOTTY]

Well said Shareguy. Like you, I'm very excited about the future of HGH both here in NZ and as the owner of a Bank in Australia. Kiwis in both NZ and Australia will be keen to support a NZ owned Bank in Australia.

[winner (n)]

Will Challenger be good for HGH .......discussion is a echo of what might happen when they acquired Australia Seniors Finance in OZ a few years ago.

Seem to have worked out OK

[Basil]

Pretty clear downtrend since $2.50 2 years ago. Beagle's nose for a feed says wait for a P.E. of 9.
9 x 13.5 = $1.21. That metric has happened before in a recession and is a real chance again.  Risky business buying in a downtrend.

[winner (n)]

Pretty clear downtrend since $2.50 2 years ago. Beagle's nose for a feed says wait for a P.E. of 9.
9 x 13.5 = $1.21. That metric has happened before in a recession and is a real chance again.  Risky business buying in a downtrend.

Current downtrend result of rerating ........P/B ratio of about 1.9 down to just over 1.0 currently .....and Beagle sees it going down to 0.9 and then it's cheap/BUY and we all get rich again as multiple expands

Can't help but noticing that TRA has seen decent multiple expansion over last year and P/B near historical highs ........could say becoming quite overvalued and due for a decent rerating down ....unlike HGH maybe a SELL now and buy back say $3.50

HGH/TRA similar financials in consistent ROE and relatively high dividend payout  percentage

Be interesting to see how market reacts over next few months.

[Basil]

Price to book is much more relevant when comparing apples with apples, i.e one financial institution with another, but finance is currently only generating a modest part of Turners profits and their real brilliance is in their marketing.
TRA has grown earnings very nicely in recent years.  On the other hand, Heartland's eps growth has been disappointing. 
Unpacking that a bit more and looking at my standard 5 year analysis period, off Jarden Direct's website, TRA has grown earnings from 26 cents in 2019 to a broker average forecast of 40 cents in FY24, that's a highly impressive CAGR of 9% per annum.
On the other hand HGH has grown earnings from 13 cents in 2019 to a forecast for FY24 of only 13.5 cents, that's less than 1% average growth eps annum! 

I would argue that Turners deserves to trade at a significantly higher PE multiple than HGH but it doesn't.
I also think with HGH's recent poor track record with earnings growth they deserve to trade 1-2 PE below their Australian peer group which have grown faster, but they don't.  Jeff has a heck of a lot of work to do to achieve his ambitious goals for the future.  Maybe if he wasn't so obsessed with all things ESG...

[winner (n)]

Basil .....you should a sum of parts valuation of Turners

What's the Auto Retail division with its brilliant marketing (and growth) worth and what's the financial part (finance, insurance, credit, property) worth ....assuming different multiples for each part?

Add the 2 parts and you might get more than 5 bucks eh

[Basil]

It's all interconnected so there's no need to make it more difficult than it needs to be.

[Basil]

Woke up this morning and for some reason the saying of "go woke, go broke' came to mind in regard to HGH.
Didn't think any more about it until a few minutes ago watching CNBC and they had a segment on Aust banks and most are up single digits percentage over the last year. Just looked up HGH chart for the last year and oh dear....down from more than $1.80 this time last year.   Hmmm... maybe something in that saying.   

[Shareguy]

Craigs latest says

Current trading multiples
At the current price HGH is trading on:
A price-to-book multiple of 1.0x (vs. Aus sector average of 1.4x)
A rolling forwards P/E of 10.0x (vs Aust sector average of 13.9x, with the 4 major banks averaging 14.8x).
A forward cash dividend yield of 7.0% based on 75% payout (vs Aust sector average of 5.7% with an average payout of 77%).

Outperform

Disc Have been buying