HGH - Heartland Group Holdings

[winner (n)]

That $200m in 2028  'ambition' only requires core lending receivables growth rates at historical rates

Sort of says the extra profit in Aussie doesn't have to be outrageously high

Pretty conservative 'ambition' I reckon even if it is doing a lot more with not more resource (cost)

[Basil]

https://www.marketscreener.com/quote/stock/HEARTLAND-GROUP-HOLDINGS--47041144/finances/
Revisions from analysts are in and on average they see eps of 16 cents for FY25 and 18 cents for FY26
Dividends are 11 cps for FY25 rising to 12 cps for FY26.

I'm happy with those forecasts and think they are fair and reasonable.
At yesterday's close of $1.22 less the almost immediate giveback of a 4 cent divvy = net purchase price of $1.18 the metrics are
FY25 PE 7.3   FY25 Gross yield 12.9% (11/0.72 = 15.27 / 118)
FY26 PE 6.6  FY26 Gross yield 14.1% (12/0.72 = 16.67 / 118)

I welcome the opportunity, if it presents, to invest further funds at a discounted price in a capital raise to support their Australian growth ambitions.

[SCOTTY]

Fair enough, I'll let it go. But he who doesn't learn from - recent - history is doomed to repeat it. Check-in when the next cap raise is announced.

And as a dividend sniffing hound, let's check out this metric. EPS has collapsed from 7.3 to 5.3cents per share. And net cash flows from operating activities are now in the negative. The dividend has been cut from 5.5c to 4c but even then - where's the money going to come from for future dividends, particularly if operating costs continue to climb. Issuing more shares to fund Challenger is only going to squeeze things further. HGH do not appear to be able to fund current dividends and the final dividend will be cut to probably about 4c. That's 6.6% gross yield on current SP. And that's if you're lucky. Worth the risk? I don't think so.
You can get 6.3% term deposit - at Heartland - guaranteed. Sometimes owning the bank isn't the right thing.

Please correct me if I'm wrong but:
4c divi would have imputation credits of 1.556c. If total annual dividend was 8c with imputation credits gross dividend would be 11.112c. At today's sp of $1.23 = 9.03% gross yield. Considerably better than your 6.3% term deposit.
Hopefully the final dividend will be better than the 4c

[LoungeLizard]

Please correct me if I'm wrong but:
4c divi would have imputation credits of 1.556c. If total annual dividend was 8c with imputation credits gross dividend would be 11.112c. At today's sp of $1.23 = 9.03% gross yield. Considerably better than your 6.3% term deposit.
Hopefully the final dividend will be better than the 4c

Depends on whether you value a fully imputed share or not. I'm retired so I have a stack of unused credits that I can't apply. So, yes, not including the effect of imputation, for me the return is 6.6%. I can get close to that on a term deposit and claim most of the tax back.

Looking at HGH's accounts I think future dividends are under real pressure. It's baffling for me that those that focus primarily on dividends are buying in at the precise time that dividends have been cut and are likely to be cut further. All of a sudden the focus has shifted to growth in the SP, which is a very uncertain, long term thing. If there is a capital raise you are going to be left with a share whose SP is going south together with a below average yield. Not a good place to be.

I see a trading opportunity with HGH and those, like Basil, who got in at sub $1.20 might get the divvy and out again ex-dividend at the price  they got in at. If so, good on you. I'm not a trader and in the medium term, regardless of what PE forward projections say, I'm wary of buying in at this point. PE projections are a very useful tool and I appreciate Basils talent at this form of analysis - I've used them to guide my thinking a number of times - but there's other potentially negative issues at play here, which for a conservative investor like myself, make me uneasy.

But, each to their own. HGH will come right at some point, when that is no-one knows for sure. That's the fun part in investing - trying to second guess the market!

[Basil]

HGH took ~ $15m in one-off extraordinary items this half as the result of legacy issues with old loans that they believed they were not vigilant enough to collect.
That's what driven the dividend cut this half.

I am treating this as a one off item because it is the first and only time HGH in their entire history as a listed company has ever taken a hit from extra loan provisioning, (Covid provisioning aside).

I'm happy to look through this in making my assessment as to future income and I think the vast majority of people find the imputation credits very valuable.  Frankly I find the thought of a 14% gross yield in FY26 and growing in the years that follow extremely attractive.  I note all the analysts are also looking through this latest loan provisioning in determining their expectations of future dividends and I posted the gross yield forecasts above.

I get it that some people are sick of the one-off's and that the reasons behind them are sometimes very complicated, (their derivatives which Fiordland Moose explained) and sometimes have poor optics, like their provisioning around their investment in Harmoney and the most recent provisioning all seems a bit much in recent years.

I also get it there are risks with their expansion with Challenger bank as to firstly whether the deal is approved from a regulatory perspective and secondly funding it with deposits and a capital raise.  I think the early signs in terms of raising over half a billion dollars on deposits at 1.34% below their current cost of funds in Australia are very encouraging.

I'm also not enamored at all with their obsession around all things ESG.

What I also get that some don't seem to, is that all the above and then some is fully factored into the price and then some for good measure.  HGH has never in its entire history as a listed company traded at the extremely low forward earnings multiples it currently trades on which are circa half its peer group.  Listen up LL because this is the key to my investment thesis.  I expect this hugely anomalous situation to revert to the average over time, regardless of whether the Challenger bank acquisition proceeds or not.  Over time I expect HGH's PE to revert to a normal range of 11-13 not the ~ 7 it currently sits at, that's with or without the Challenger bank deal proceeding.

Further, my contention is we are currently scraping along the bottom of the economic cycle and as interest rates ease the economy will improve.  I also note the latest inflation data in Australia yesterday, low 3% range from memory, was highly encouraging and is tracking well below N.Z's 4.7% so there's every chance they will ease interest rates before us and their economy will outperform our's.  I think this is a very good time to be expanding into Australia.

If they can pull this off and get somewhere around $180m in profit in FY28 on an expanded capital base which should be somewhere in the low 20 cents per share earnings I think this could easily go back over $2 in the next few years.  In the meantime the yields I posted in #721 of 12.9% in FY25 and 14.1% in FY26 are extremely attractive so we've got the prospect of being paid extremely well while we wait for that growth.

I think the opportunity outweighs the risks.

[LoungeLizard]

HGH took ~ $15m in one-off extraordinary items this half as the result of legacy issues with old loans that they believed they were not vigilant enough to collect.
That's what driven the dividend cut this half.

I am treating this as a one off item because it is the first and only time HGH in their entire history as a listed company has ever taken a hit from extra loan provisioning, (Covid provisioning aside).

I'm happy to look through this in making my assessment as to future income and I think the vast majority of people find the imputation credits very valuable.  Frankly I find the thought of a 14% gross yield in FY26 and growing in the years that follow extremely attractive.  I note all the analysts are also looking through this latest loan provisioning in determining their expectations of future dividends and I posted the gross yield forecasts above.

I get it that some people are sick of the one-off's and that the reasons behind them are sometimes very complicated, (their derivatives which Fiordland Moose explained) and sometimes have poor optics, like their provisioning around their investment in Harmoney and the most recent provisioning all seems a bit much in recent years.

I also get it there are risks with their expansion with Challenger bank as to firstly whether the deal is approved from a regulatory perspective and secondly funding it with deposits and a capital raise.  I think the early signs in terms of raising over half a billion dollars on deposits at 1.34% below their current cost of funds in Australia are very encouraging.

I'm also not enamored at all with their obsession around all things ESG.

What I also get that some don't seem to, is that all the above and then some is fully factored into the price and then some for good measure.  HGH has never in its entire history as a listed company traded at the extremely low forward earnings multiples it currently trades on which are circa half its peer group.  Listen up LL because this is the key to my investment thesis.  I expect this hugely anomalous situation to revert to the average over time, regardless of whether the Challenger bank acquisition proceeds or not.  Over time I expect HGH's PE to revert to a normal range of 11-13 not the ~ 7 it currently sits at, that's with or without the Challenger bank deal proceeding.

Further, my contention is we are currently scraping along the bottom of the economic cycle and as interest rates ease the economy will improve.  I also note the latest inflation data in Australia yesterday, low 3% range from memory, was highly encouraging and is tracking well below N.Z's 4.7% so there's every chance they will ease interest rates before us and their economy will outperform our's.  I think this is a very good time to be expanding into Australia.

If they can pull this off and get somewhere around $180m in profit in FY28 on an expanded capital base which should be somewhere in the low 20 cents per share earnings I think this could easily go back over $2 in the next few years.  In the meantime the yields I posted in #721 of 12.9% in FY25 and 14.1% in FY26 are extremely attractive so we've got the prospect of being paid extremely well while we wait for that growth.

I think the opportunity outweighs the risks.

Fair enough. You may well turn out to be absolutely right, Basil. You have an excellent track record in spotting opportunities, and I, like others, value your insight. I err on the side of extreme caution so I've missed out on opportunities and this could be one of them.

But by the same token, I've never taken much of a loss in all my time of investing. I actually did alright in investing in HGH relatively early and bailing out very quickly at $1.80 before the cap raise fiasco kicked in. So maybe in missing out on a few highs I've avoided the lows as well. There's more than one way up the mountain! Best of luck with this one, mate.

[Basil]

Thanks for your kind words mate and yes, this is not without risks and fair enough if its not for you.  TRA is a much lower risk way to play the recovering economy and they have proven over the last 4 years their business model is extremely resilient in tough economic times.  Who would have thought they could get 4 record years of profit in a row through Covid, the recession and all the cost-of-living pressures in the last couple of years.  Truly remarkable!  I love it, their marketing and execution overall is absolutely brilliant, and I very happily retain a substantial holding long term.  Honestly, I couldn't be happier and more comfortable about the way TRA management are looking after our interests.  I never lose a single minute of sleep with that one and the forward metrics with them make for a truly compelling long-term hold !   We'll both do really well there in the years ahead

[winner (n)]

The path to $200m in 2028 is their ambition but not too outrageous

Seems it's just a continuation of what they've done in the past ..see chart

Note: started reverse mortgages and acquired Seniors AU in 2014

You cannot view this attachment.

[winner (n)]

Some seem worried about cap raises

Why worry ....they are always eps accretive ....more capital ...more profit ....profit drives share price

[Basil]

Nice image Winner, thanks for sharing.  Forbar are at $168m for FY28 but not allowing anything in the way of growth for motor vehicle and other types of new potential lending in Aust.

I expect and am fully prepared for a large capital raise later this year to kick start the capital of Challenger bank in order to meet minimum Aust regulatory requirements for capital. I'm happy to support their growth ambitions in Australia.   Off the expanded capital base yes, I think $200m is not an unreasonable target.  Broker average is for 18 cps in FY26 so extrapolate a couple of years of eps growth at mid to late single digit figures and eps could be 20-21 cps by FY28.  Put a normal mid-range PE of 12-13 on that and that suggests $2.40-$2.70 by FY28 is quite feasible.

[BlackPeter]

Maybe Heartland can turnaround Challenger and if they can, then hats off to Jeff...

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

Challenger remains the big unknown. It will either turn out to be a masterstroke or a millstone. It will be fascinating to see how it turns out.

Whatever of these options Challenger will turn out to be, it is Heartlands ticket into the Australian money market. Only an Australian bank is allowed to take deposits in Australia. They need them to fund their rapidly growing Australian REIT business - and picking up these funds in Australia is much cheaper and less risky (exchange rates) than shifting funds from NZ.

I think Challenger was for them a must buy, but sure - if the ticket generates on top of an entry its own money, this would be like the goose laying golden eggs, wouldn't it?

[Left Field]

Can Heartland succeed in Oz where so many NZ companies have failed?

Latest article by Jenny Ruth for those who have a subscription.

[snapiti]

I have had HGH on my buy watch list for sometime and have decided to put 50% of the allocated funds to work. These funds have a 10 year view which when it comes to Heartland they need to be as I think Heartlands is in for a tough 12 months due to the macro environment.
I do have my concerns about this comment from the company ~$15m in one-off extraordinary items this half as the result of legacy issues with old loans that they believed they were not vigilant enough to collect.
This comment smells rank based on experiences I know of from how the company goes about chasing up over due loans. They are extremely persistent
What I think it really means is they have a rapidly increasing amount of loans that they believe will not be recoverable, this is due to the macro environment and I believe you will see more of these surprises at their next 2 financial. 

[winner (n)]

Seems the $200m in 2028 is an AMBITION DOWNGRADE ...apparently it was $220m in 2028 before

Can't be true ..can it?

[winner (n)]

Getting larger in Aussie will be no problem .....Jeff has sent Chris Flood over there to see it happens

Good bloke that Chris