HGH - Heartland Group Holdings

[Basil]

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.

You could be right but to be clear, there has only ever been one of these surprises in relation to loans in HGH's entire history, so I'd bet on you being wrong.

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

Sales and Marketing 101, it's important for aspirational goals and targets to be realistically achievable otherwise rather than acting as a motivational force, they demotivate the team.  I know Jeff has coped a lot of criticism for this goal but I see it as something that's very helpful.  It's important the whole team are engaged in working towards achieving this outcome, or as close as they can get to it.  It gives them a clear focus and target to work towards and ifs frankly far more productive than team members focusing on mindless ESG nonsense.

Concerns over the Challenger bank acquisition based on other companies from N.Z. not succeeding in Australia appear to me to be very simplistic in their nature, (unconscious bias).  HGH already has a highly successful business over there with 41% of the reverse home loan equity market and it's been going for many years, is highly profitable with very low risk and is growing very strongly, circa 20% per annum.  Reverse home loans also have no margin risk as the interest rates can be adjusted (or not adjusted as the case may be when their cost of funds declines 134 basis points) as their cost of funds changes.

Good things take time.  Thing is with the share price where it is with economic concerns here, if you wait for better economic times in say 12-18 months, it's very unlikely the share price will be where it currently sits.  The analogy I would use is this, if you buy a boat in Winter, you will get a lot better price than in Spring or Summer.

[snapiti]

You could be right but to be clear, there has only ever been one of these surprises in relation to loans in HGH's entire history, so I'd bet on you being wrong. Sales and Marketing 101, it's important for aspirational goals and targets to be realistically achievable otherwise rather than acting as a motivational force, they demotivate the team.  I know Jeff has coped a lot of criticism for this goal but I see it as something that's very helpful.  It's important the whole team are engaged in working towards achieving this outcome, or as close as they can get to it.  It gives them a clear focus and target to work towards and ifs frankly far more productive than team members focusing on mindless ESG nonsense.

Concerns over the Challenger bank acquisition based on other companies from N.Z. not succeeding in Australia appear to me to be very simplistic in their nature, (unconscious bias).  HGH already has a highly successful business over there with 41% of the reverse home loan equity market and it's been going for many years, is highly profitable with very low risk and is growing very strongly, circa 20% per annum.  Reverse home loans also have no margin risk as the interest rates can be adjusted (or not adjusted as the case may be when their cost of funds declines 134 basis points) as their cost of funds changes.

Good things take time.  Thing is with the share price where it is with economic concerns here, if you wait for better economic times in say 12-18 months, it's very unlikely the share price will be where it currently sits.  The analogy I would use is this, if you buy a boat in Winter, you will get a lot better price than in Spring or Summer.

HGH in their modest time as a listed company have had many favorable macro economic tail winds, unfortunately many who use second tier lenders are really struggling because of the cost of living and interest rates, that aint going away in a hurry, certainly farmers are doing it tough as well, amazing how companies like to cover up poor results with smoke n mirrors comments, reality is once a loan is taken out it could be considered a legacy loan tomorrow, Hopefully the $15m "legacy" loans written off is a one off, as you suggest Basil, to clear the deck, but I doubt it will be, best you can hope for is for less next time and perhaps they will call the next round of loan write offs by another name. HGH  SP has been falling for sometime and I suspect it was the market expecting "legacy" loans to be an issue due to the same macro environment which is still in place

[Basil]

HGH in their modest time as a listed company have had many favorable macro economic tail winds,

The last 4 years with the Covid pandemic and all the associated roll on effects have been extremely challenging for many businesses.  Many have faced unprecedented challenges and I think HGH have come though it very well, including the regional bank mini crisis in the US about this time last year.

amazing how companies like to cover up poor results with smoke n mirrors comments, reality is once a loan is taken out it could be considered a legacy loan tomorrow,

best you can hope for is for less next time and perhaps they will call the next round of loan write offs by another name.

WOW, that's a very cynical and jaundiced view

I suspect it was the market expecting "legacy" loans to be an issue due to the same macro environment which is still in place

Acknowledge we are currently scraping along the bottom of the economic cycle.  If you're waiting for the "Red Sea to part" so too speak and better economic times to make themselves completely obvious the shares are not going to be close to where they are priced in an economic trough.

[Basil]

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

Given your most recent post mate I am not sure why you bothered?  Just as an aside, I have found there is no mileage in holding these through thick and thin over the years.  Buy in gloom and sell in boom.  Usual trading range is a forward PE of 9-18.  Trades move with the economic cycles so they're not short term trades per se.  We're about 7 forward PE for FY25 which has never happened before and I note is cheaper than the trough Covid low on a forward earnings basis.

Yeah, I get it a lot of people are jaundiced from a number of one-off items in recent years, I really do and some like you are super cynical and think the recent extra loan provisioning will be a recurring theme but I believe all that is priced in and some extra for good measure due to uncertainty about the regulatory approval for the Challanger bank acquisition and the possible capital raise.

Its always darkest before the dawn.

[snapiti]

Given your most recent post mate I am not sure why you bothered?  Just as an aside, I have found there is no mileage in holding these through thick and thin over the years.  Buy in gloom and sell in boom.  Usual trading range is a forward PE of 9-18.  Trades move with the economic cycles so they're not short term trades per se.  We're about 7 forward PE for FY25 which has never happened before and I note is cheaper than the trough Covid low on a forward earnings basis.

Yeah, I get it a lot of people are jaundiced from a number of one-off items in recent years, I really do and some like you are super cynical and think the recent extra loan provisioning will be a recurring theme but I believe all that is priced in and some extra for good measure due to uncertainty about the regulatory approval for the Challanger bank acquisition and the possible capital raise.

Its always darkest before the dawn.

I just like going into an investment eyes wide open, happy to bank a few and will be happy to bank some more should they decline another 20%

[Basil]

Fair enough Snapper. I've also invested in a carefully measured way with plenty in reserve for further investment and / or a capital raise.

[LoungeLizard]

Fair enough Snapper. I've also invested in a carefully measured way with plenty in reserve for further investment and / or a capital raise.

It's interesting Basil, that you see a potential cap raise as an opportunity to buy more, whilst some - including me -  see it as a potential bear trap waiting for investors to fall into.

 We all know just how deleterious the last cap raise was back in 2022. Shareholders who participated in that are now holding shares worth a third less. And the divvy on those shares has now been cut.

I guess it will be said that that was then and this is now. As if HGH are fundamentally different to the bank they were only 18 months ago. It's strange to me that some who participated in the last cap raise - and took a bath like everyone else - still talk up the prospect of the next one. Faith in Jeff obviously runs deep.

I'm not saying all cap raises end badly for investors, but a lot do. Personally, I prefer companies that fund their business strategy with plain old credit facilities or by issuing bonds. You can only go to the well so often before investors get sick of the yo-yo effect on the share price.

Actually, one wag on the other channel said that if it wasn't for HGH's string of cap raises, the SP would be $5 by now. A joke of course, but there might be a grain of truth in it

[Basil]

It's interesting Basil, that you see a potential cap raise as an opportunity to buy more, whilst some - including me -  see it as a potential bear trap waiting for investors to fall into.

People will see what they want to see.  I see the economy in a bottoming process and fresh capital raising giving the prospect of strong growth in Australia and that fresh capital if its sought, will be on an extremely attractive earnings multiple.  I guess it all depends on whether you're looking backwards or forwards.  I prefer looking forwards, a Beagle's nose picks up the scent of the next feed better when facing that way.

We all know just how deleterious the last cap raise was back in 2022. Shareholders who participated in that are now holding shares worth a third less. And the divvy on those shares has now been cut.

I participated but have processes in place to manage risk and one of those is if a stock goes into a confirmed downtrend I cut my losses and wait for a better time.  Fact is Heartland's financial performance is inextricably linked to the performance of the economy and as our economy has tanked, so too have HGH shares.  As stated in earlier posts I think we're now scaping along the bottom of the economic cycle.

I guess it will be said that that was then and this is now. As if HGH are fundamentally different to the bank they were only 18 months ago. It's strange to me that some who participated in the last cap raise - and took a bath like everyone else - still talk up the prospect of the next one. Faith in Jeff obviously runs deep.

What's different is the phase of the economic cycle we're now in.  Interest rates are at a peak and the prospects for improvement over time should be clear.  I didn't take a bath with the cap raise but I got a bit of a haircut.  I try and win big and lose little and manage downside risk.  Nobody wins every time.  Its not about blind faith as you imply. I am prepared to give Jeff the benefit of the doubt for his one and only write down in receivables in the companies history on the basis that the share price now fully accounts for the effect of that, and then some..  If it happens again, I'll take a different view.

I'm not saying all cap raises end badly for investors, but a lot do. Personally, I prefer companies that fund their business strategy with plain old credit facilities or by issuing bonds. You can only go to the well so often before investors get sick of the yo-yo effect on the share price.
Actually, one wag on the other channel said that if it wasn't for HGH's string of cap raises, the SP would be $5 by now. A joke of course, but there might be a grain of truth in it

Turners have learned that lesson and got that message loud and clear from their investors and their shares are nearly $5 and I prefer that method of growing too which is why I have 2.5X in them compared to HGH at present.  What's changed is the metrics.  As mentioned earlier, they're now compelling and completely disjoined and far below their peer group who all face the same headwinds from the current low ebb in the economic cycle.  HGH has been harshly dealt too by the market since their December 2023 trading update whereas its peer group have performed strongly and the disconnect is now so extreme I think HGH for all its ESG nonsense and recent fumbles is now a deep value buy.  If you think it's a value trap, that's fine mate.

As far as I am concerned, a forward PE of about 7 covers a multitude of misdemeanors, (and that's what they are not commercial crimes), for a company that will grow eps over time with or without the Challanger bank acquisition.  If you focus on the things you're not happy with you will lose the opportunity to buy a stake in this company that's the cheapest it's ever been in its history on a forward earnings basis.  You snooze, you lose in my opinion but please, I am not here to sell the idea to anyone so what anyone does they do of their own volition but as always, I am happy to explain what I have done and why and I think I've done that in a very thorough way now.
Disc ~ 5% portfolio position.


 

[Teitei]

It's interesting Basil, that you see a potential cap raise as an opportunity to buy more, whilst some - including me -  see it as a potential bear trap waiting for investors to fall into.

 We all know just how deleterious the last cap raise was back in 2022. Shareholders who participated in that are now holding shares worth a third less. And the divvy on those shares has now been cut.

I guess it will be said that that was then and this is now. As if HGH are fundamentally different to the bank they were only 18 months ago. It's strange to me that some who participated in the last cap raise - and took a bath like everyone else - still talk up the prospect of the next one. Faith in Jeff obviously runs deep.

I'm not saying all cap raises end badly for investors, but a lot do. Personally, I prefer companies that fund their business strategy with plain old credit facilities or by issuing bonds. You can only go to the well so often before investors get sick of the yo-yo effect on the share price.

Actually, one wag on the other channel said that if it wasn't for HGH's string of cap raises, the SP would be $5 by now. A joke of course, but there might be a grain of truth in it

I have never known banks NOT to undertake capital raisings on a fairly regular basis - it's in their DNA!

I often scratch my head as to why they bother to pay dividends and in fact, they have at times paid dividends and raised capital at the same time! Guess shareholders in banks see them as dividend stocks so they must keep the faith.

I agree with you that HGH is currently trading cum-CR as that's the market consensus out there that they need additional capital to tackle Australian banking properly. And many (including me) are wary indeed of NZ companies expanding into Australia!

[Basil]

Great article by Jenny Ruth the other day on the Heartland Australian expansion...extract
Heartland already has years of operating experience in Australia under its belt and there is another crucial signal that it's likely to succeed across the Tasman.  Challenger has starting raising retail deposits and, in the seven weeks beginning Jan 8 this year, raised $528 million at a rate that Heartland said was 134 basis points lower than its current cost of funds.  It has financed the reverse mortgage business in Australia to date through wholesale money by selling medium term notes and through securitisation.
She goes on to note that Heartland have a dominant market share of 41% in the reverse home loan business in Australia with strong ongoing growth of 20% per annum.    HGH already have a very strong and highly profitable market presence in Australia. 

Analysts forecasts EPS and DPS
Craigs FY24 13, 10
Craigs FY25 14, 10.8
Craigs FY26 17, 12.8
Price target $1.76

Forsyth Barr FY24 15.1 , 10
Forsyth Barr FY25 15.8, 11
Forsyth Barr FY26 18.4, 12
Price target $1.37

Worth noting: Both analysts are picking good growth in earnings and dividends in FY25 and FY26. 

[winner (n)]

I have never known banks NOT to undertake capital raisings on a fairly regular basis - it's in their DNA!

I often scratch my head as to why they bother to pay dividends and in fact, they have at times paid dividends and raised capital at the same time! Guess shareholders in banks see them as dividend stocks so they must keep the faith.

I agree with you that HGH is currently trading cum-CR as that's the market consensus out there that they need additional capital to tackle Australian banking properly. And many (including me) are wary indeed of NZ companies expanding into Australia!

Over last 6 and a half years HGH have made $529m in profits and paid out $387m in divies....ie retained $142m for future growth. Not much eh ..reflectingbpayout ratio of 73%

DRP has given them $79m capital and capital raises over that time another $257m capital.

Could say (cynically) capital raises are needed to keep paying the high dividends.

That high payout ratio will always be a drag on the share price.

[winner (n)]

When I say the high dividend payout will be a drag on the share price I'm really saying that it's unlikely to get to $2.50

But as Basil wisely points out the HGH share price is subject to extremes in market sentiment ...like gloom now and often times of super exuberence (the $2.50 time) ..or in investing terms undervalued and overvalued

One can see how that market sentiment changes from that Price/Book chart I put up the other day. Whether your preferred valuation multiple is P/B or PE (essentially the same) now is a great time to be buying HGH but as Basil points out when that multiple gets very (excited punters) have plans in place to see ....and await the next opportunity

I'm sure Basil won't mind me summing up his current thinking in that HGH is now dirt cheap and in a couple of years the forecast dividends will be even juicier than now (meeting divie hound in him) but if punters get excited and share price goes over $2.20 his exit plans will will be enacted

Can't lose strategy methinks

[Basil]

Glad someone gets it but the fact that most don't confirms my belief that sentiment is extremely negative...a classic buy in gloom strategy that's got a very high probability of sucess

[winner (n)]

The impact of Heartland's high dividend payout ratio and capital raises can Belsen in table below

Like underlying NPAT last 5 years have grown at 10.% pa (reported NPAT at 7.6%pa) but underlying EPS has grown at 5.1% pa. Remember the rule that EPS drives share price.

Book Value (or Shareholder Funds) is essentially the value of the company. It basically increases from retained earnings plus new capital. In $ terms it has grown at 9.2% pa but on a per share basis it's grown at just 4.0% pa. Remember BV is also a key driver of market valuations (ie share price)

Hope you can see this is why I keep saying high dividends and the need for capital raises has been and no doubt continue to be a drag on the share price...after all on a per share basis HGH is a low growth company and if anything its share price is driven by prevailing sentiment.

Whatever currently gloomy times so good time to buy.

I've also noted the number of shares over the years ...from capital raises and from DRP

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[winner (n)]

Even the Heartland web site seems to be crying out BUY BUY at $1.22

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