HGH - Heartland Group Holdings

[Plata]

"Post-COVID-19 staff turnover, illness and a focus on the core system upgrade (which is now complete) in Heartland Bank's Collections & Recoveries area have resulted in collection efforts being constrained. These challenges are being actively resolved, but coupled with the passage of time, confidence in the collectability of these arrears has been eroded and Heartland Bank considers it appropriate to take a $10.5 million overlay."

What??? They just forgot to nag them for payment on the loans? You would think recovering the loans would take priority over a system upgrade. Do you guys think this is BS or what? This reads worse to me than just admitting they were jumping the gun in releasing covid overlay. EPS shaping up to be ~13.5 cents.... what do they say about catching falling knives again?

[Ferg]

I didn't interpret it as BS.  Rather it was additional details on loan provisions and they are drawing a line under COVID impacts - IOW they are not expecting any more was my view.  System upgrades are often challenging and things can slip through the cracks which as you say is not good.  Per the next part of the release:

"Overall, impairments continue to perform within expectations with a YTD impairment expense ratio (annualised impairment expense as a percentage of average Receivables) of 0.35% (1H2023: 0.29%)."

[Basil]

Is the Beagle/Basil in for a feed at these levels? You have a good nose for HGH big feeds

I had a wee dabble in HGH shares last year, not many, only a 4% portfolio allocation.  Lost a bit, cut my losses and got out, from memory at just over $1.60.
Are they a good buy now ?  I would argue they probably are about fair value now on a fundamental basis.  I really thought things were going to go a lot better for  them in FY24 and the downgrade was a shocker in my opinion.

9 times about 13.5 - 14.0 cents is about $1.25 but are they really going to earn that much this year and what size capital raise is coming?  Bottom picking is a messy business, and the chart looks absolutely terrible.  At this point I am waiting for some technical sign that we've hit a bottom.  Buying a strong downtrend is very risky.  I'd much rather buy a stock at fair value when the chart says a bottom is in and there's some reasonably solid technical indicator like a break back up through the 30 day moving average to support the good value thesis.  Sitting on my hands for now and watching the carnage unfold.
Muddying the waters is all the extraordinary items and questions about whether they will get regulatory approval for their stated ambitions.

[Basil]

An excellent post from Muse on the other channel for those that haven't seen it.

did you read that profit update? there was heaps to not like about it and has set off some heavy volumes this week which I can only imagine is an insto(s) selling down their position....2023 calendar year ave daily volume was about 300k - this week up to 816k. Some of the key things on the minds of many:

* Challenger expected to lose A$3.5m in the 3 month period from 31 March to 30 June 2024. This doesn't include expenses associated with the transaction. Mgmt say "This is expected to transition quickly to a profit-making position as material deposit raising occurs" but I think its fair to be weary on how long it will take to be efficiently & economically raising deposits in Australia in scale. What channel will they quickly raise deposits from? People know HGH in NZ - how are they going to attract depositors in Australia - I would have thought it would take time to build up brand awareness. The company is paying cold hard cash for a business that is presently deeply loss making. I don't think anyone realised what a loss making business this was and mgmt could have done a better job at communicating and taking shareholders along the journey, rather than surprising all with this. This will result in more goodwill being included on the balance sheet, and they already included a whack of goodwill after (in my view) overpaying for StockCo - so goodwill as a proportion of BV is increasing. Should probably be reflected in a lower price/bv multiple.

* The company has lost some credibility in my view regarding provisioning. In post #167222, I talked to how they used up $5.6m of the $8m economic overlay, and did not top it up (and hence why I regarded the FY23 result as a miss to their guidance), and how their provisioning as a % of gross receivables actually fell when one would normally have thought it'd go up with the macro backdrop. It's clear to me that they should have topped up their provisioning last year. and with a potential, and in my view, likely, equity raising coming to support the acquisition of challenger, it raises fair questions of have they provisioned enough, or are they trying to soften the blow in the lead up to the acquisition? I note the extra provisions this year relate to old/historic loans to auto retailers & motor book (nothing written in the last 5 years), so good to see its not happening on the new loans written after they changed lending mix, but still not a good look.

I think they have screwed the pouch a bit.

Had they just provisioned more at 30 June 2023, the market wouldn't have liked it, but it'd would have had time soak in and readjust & re-rate. Or at least include increased provisions in the initial FY24 guidance. They didn't do any of that & went ahead and issued quite bullish guidance and talked a big game of 5 year npat growth, only to have to backtrack on guidance very quickly. It looks naive at best, to me. That has unnerved the market, probably fairly so, and now the SP is tanking right at the time they will probably have to do a decent sized equity raising. It will in my view have to be at a pretty discounted level to get it done given sentiment. If its underwritten it will be quite expensive. And it'll be meaningful - the chit chat is $150-200m, when the marketcap is at about $915m as of today. Given the weak share price and potential size of the issue, it'll be well dilutive particularly for any of those who aren't in a position to take their pro rata. I also wouldn't be surprised to see the stock crash below its theoretical ex price or discounted raising price, like it did during the StockCo placement & rights issue.

So I think there are a few holders like me with that on their mind and thats really impacted sentiment.

I took a bit of risk management action back when I saw El Nino starting to hit the headlines and the share price was pretty strong so I'm thankful for that, but no where near enough. a little bit more after the announcement. I still hold and while I'm cognisant of what I just wrote I sorta can't be bothered to sell anymore as I do think its below its FMV and it'll rebound well after the overhangs are removed (ie, selling at / near the bottom of the cycle often not a wise thing to do), likewise I anticipate the SP to be in a rough patch particularly if an equity raising is required. I'm certainly not buying anymore at these levels, though if a rights issue is announced sorta wont feel like I have a choice given the potential dilution, or wait for as long as possible to see if cheaper to pick up on the secondary market if below the discounted issue price. I'd quite like to do the later. I suspect an insto or two is thinking the same thing.

anyway those are my random thoughts, as of this hour. certainly not advice on what to do or what will actually happen, just reasonably held suspicions on how things could play out.

& edit - as an aside - I do openly wonder if it would become in shareholders best interest for the Challenger acquisition not to proceed, simply as a result of the possible dilution. The AU RM acquisition was a great success. StockCo they overpaid for and I think a lot of their assumptions on its future financial performance have proved faulty (ie, stock lending is an industry where 'things happen' is normal and price should have reflected that). I know getting a banking license is incredibly tough and opens the door to a lot of low cost funding which they can refinance their entire australian business with, but they are effectively already paying for their own involvement (& future upside) by buying so far above book value, taking on all these meaningful transaction losses, absorbing Challengers losses for a period of time (a year?), and then raising extra regulatory capital and working capital to fund it all.

I hope the jr banker at Jarden or whatever investment bank that is giving them advice on transaction structuring and shareholder returns has enough real world experience to address all that stuff. but not hopeful.

[Greekwatchdog]

I had a wee dabble in HGH shares last year, not many, only a 4% portfolio allocation.  Lost a bit, cut my losses and got out, from memory at just over $1.60.
Are they a good buy now ?  I would argue they probably are about fair value now on a fundamental basis.  I really thought things were going to go a lot better for  them in FY24 and the downgrade was a shocker in my opinion.

9 times about 13.5 - 14.0 cents is about $1.25 but are they really going to earn that much this year and what size capital raise is coming?  Bottom picking is a messy business, and the chart looks absolutely terrible.  At this point I am waiting for some technical sign that we've hit a bottom.  Buying a strong downtrend is very risky.  I'd much rather buy a stock at fair value when the chart says a bottom is in and there's some reasonably solid technical indicator like a break back up through the 30 day moving average to support the good value thesis.  Sitting on my hands for now and watching the carnage unfold.
Muddying the waters is all the extraordinary items and questions about whether they will get regulatory approval for their stated ambitions.

I am trying to decide to re enter as well. I am still happy to wait in the sidelines post result. I guess you could say its cheap at these levels, but its cheap for a reason and that slope is quite slippery Mind you, tpugh picking the bottom of these things

[Basil]

I am trying to decide to re enter as well. I am still happy to wait in the sidelines post result. I guess you could say its cheap at these levels, but its cheap for a reason and that slope is quite slippery Mind you, tpugh picking the bottom of these things

I think it's fair to say it's cheap for a number of good reasons.  Muse makes some excellent points.  It also hasn't escaped my attention that inclusive of all the
so-called one-off's, their track record with eps growth in recent years has been poor.  Their growing obsession with all things ESG as mentioned several times earlier, is something I find quite off-putting.  Which is better value, a company growing eps at about 1% per annum in recent years on a forward PE of 9-9.5 or a company growing eps at a CAGR of 7% on a forward PE of 11 ?  Speaking of backing up the truck as Rawz hinted at, that's why I backed up the truck and for that matter, the trailer as well, on TRA last year, (subsequently rebalanced on index inclusion).

As you imply, there's a lot of merit in seeing how bad the half year result for HGH is and letting this downtrend play itself out.  In the back of my mind is Balance suggesting downgrades happen in 3's.  Maybe that's what's going to happen here ?  I think every man and his dog thinks there's a sizeable rights issue coming as do I, and its hard to see the shares getting any forward momentum until that's done and dusted.

[LoungeLizard]

Half year result on 27th Feb will not be a good one and I'm guessing there will be more selling down ahead of that date. Trust in HGH management has been severely dented and the market is primed to react badly if the result is as bad as it could be - costs up, profits down, divvy cut etc. Even the institutions, for whom the rushed cap raise was meant to favour, have taken a bath and are selling down.

I had thought that $1.30 might be the floor but the Challenger deal has revealed a hidden basement into which HGH are shovelling money. 

My crystal ball now says an SP of $1.20 could be on the cards, perhaps even $1.10 if things really turn sour in OZ...

[Basil]

$1.26...oh dear, Jeff's halo has well and truly gone and been passed over to Todd.
Jeff can't seem to do anything right and Todd can't seem to do anything wrong.
Glad I am backing the right horse in this race.

[winner (n)]

$1.26...oh dear, Jeff's halo has well and truly gone and been passed over to Todd.
Jeff can't seem to do anything right and Todd can't seem to do anything wrong.
Glad I am backing the right horse in this race.

Might be a form reversal over next year

No doubt you prepared to change horses when you have to ..like get off one and jump on the other

[Auto Rower]

1.20 $ today is another bad  day  It's quite strange how kiwi companies never get going over the ditch .
Its looking bad for a while yet where it will end no one knows .
Harmony more loved at the moment and the sp could be worth more soon if this keeps up!!!

[Basil]

Oh my goodness, did indeed hit $1.20 intraday and closed down another 6 cents at $1.22  That's pretty shocking, Shares are almost in free-fall.  They'll be lucky if they can raise fresh capital @ $1 the way this is going.  Market has lost confidence in Jeff.   

As Muse has suggested above, it didn't feel right when announcing FY23 results that loan loss provisioning was down given the economic backdrop.  Obviously had to hit their "normalised" FY23 target so Jeff could get his annual bonus.  Subsequent creative talk about how they're being prudent to recently provide extra loss provisioning comes across as complete B.S.  They simply didn't provide enough in the first place and have been caught out.  Credibility of Jeff is now seriously in question...market thinks he's full of it.   I think he's far to ambitious and he probably needs to go and a straight talker, conservative no B.S. old school banker replacement appointed.  HGH incl all their so-called one-offs has had a miserable track record of eps growth over the last half decade.  Almost all the Australian banks have done better.

[Stockgathering]

Just a heads up for anybody who is interested learning a bit more about banking and HB in particular.
Leanne Lazarus CEO Heartland Bank will be at the NZ Share Holders, Auckland branch evening tomorrow night.
The theme of the evening is banking and a representative of the Reserve bank, Jess Rowe will also be there.

[notmaurice]

Grabbed some this morning for the Grandkids thru their sharesies acc.Grandkids range from 2 to 5 years old so hopefully by the time they can access their acc they will be plenty higher.

[LoungeLizard]

Just a heads up for anybody who is interested learning a bit more about banking and HB in particular.
Leanne Lazarus CEO Heartland Bank will be at the NZ Share Holders, Auckland branch evening tomorrow night.
The theme of the evening is banking and a representative of the Reserve bank, Jess Rowe will also be there.

Leanne Lazarus? Is that a sign Heartland are poised to come back from the dead?

[TGB]

Leanne Lazarus? Is that a sign Heartland are poised to come back from the dead?

I thought maybe you were Leanne  LL?