Tier 1 & Tier 2 Lending Covenants HY2013
Quote:
Originally Posted by
Snoopy
Once again there is no mention of Tier 1 or Tier 2 in the Heartland FY2012 report.
The 'best case' scenario is that all loans are Tier 1. $1,939.29m of loans are outstanding. 20% of that figure is:
0.2 x $1,939.29m = $387.9m
Heartland has total equity of $374.8m which is insufficient no matter what the tier classification of the loans.
Result: FAIL TEST
However the numbers are moving in the right direction. Heartland are certainly doing the right thing by retaining their earnings and not paying out a dividend.
Ironically the small reduction in the size of their loan book is helping too.
However the fact that the overall business is downsizing does mean less customer activity. Those shareholders looking for a step change in earnings are likely to be disappointed IMO.
An update here of my post on 30-08-2012
Once again there is no mention of Tier 1 or Tier 2 in the Heartland HY2013 report.
The 'best case' scenario is that all loans are Tier 1. $1,935.1m of loans are outstanding. 20% of that figure is:
0.2 x $1,935.1m = $387.0m
Heartland has total equity of $381.1m which is within cooee of the amount of capital they need if all loans were classified as Tier 1. Good stuff.
The balance of loans is shifting too:
"The business receivables book contracted by $9.7m to $530.5m"
"The rural receivables book grew from $478.6m to $480.6m"
"The retail & consumer receivables book contracted by $9.0m to $945.8m"
Overall then, the core business is contracting which gives a lie to some of the irrationally exhuberant views on where the Heartland business is going. However I see this as positive. Heartland needs to contract while their equity position is so marginal. Getting smaller will help stabilize the business, even though share price growth will likely be constrained over the medium term as a result.
"Total non-core property assets reduced by 11% during the Current Reporting Period - from $160.2m at 30 June 2012 to $143.2m at 31 December 2012. These non-core property assets are made up of net receivables of $87.9m and investment properties of $55.3m. RECL manages the ex-MARAC non-core property assets."
Great except that calling a large basket of your business 'non-core' and sticking it under the pillow doesn't make it go away. There is rather a nasty sting contained in the interim report, regarding these property loans:
"The higher impairment expense came from the non-core property book given that the RECL Agreement was regarded as fully utilised as at 30 June 2012, meaning that Heartland now has to bear any further losses in the legacy non-core property book."
IOW the cushioning effect of all previous capital raising has now run its course. Unless the value of the non-core properties improve, Heartland could be looking at some more significant proprty loan writedowns. Not good.
There is sufficient evidence here to suggest that there are significant "Tier 2 loans" within the company that means that lack of capital is a very real concern going forwards. I will continue to wait for the next HNZ cash issue before climbing on board.
Result: Tier1 and Tier 2 Lending Covenant Test Marginal
SNOOPY
Underlying Gearing Ratio HY2013
Quote:
Originally Posted by
Snoopy
The underlying debt of the company according to the full year 2012 statement of financial position is: $33,802,000m.
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:
$2,348.69m - ($2,078.28m +$55.50m + $24.22) = $190.09m
We are then asked to remove the intangible assets from the equation as well:
$190.09m - $23.00m = $167.09m
Now we have the information needed to calculate the underlying company debt net of all their lending activities:
$33.8m/$167.09m= 20.2% < 90%
Result: PASS TEST
I note that the relative debt has increased since the half year reporting date. However it is still well within acceptable levels. I would expect the debt position to worsen during the year because of all the deferred branch transformation expenditure that was shunted into the FY2013 year. It will pay to keep an eye on this figure.
SNOOPY
The underlying debt of the company according to the half year 2013 statement of financial position is: $33,894,000m.
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the problem 'Investment Properties' and the unspecified 'Investments' from that total:
$2,350.10m - ($2,044.79m +$55.32m + $24.41) = $225.58m
We are then asked to remove the intangible assets from the equation as well:
$225.58m - $22.99m = $202.59m
Now we have the information needed to calculate the underlying company debt net of all their lending activities:
$33.894m/$202.59m= 16.7% < 90%
Result: PASS TEST
The relative debt has decreased since the half year reporting date, and is well within acceptable levels. The debt position has not worsened during the year despite all the deferred branch transformation expenditure that was shunted into the FY2013 year. Good stuff. Will this trend be maintained as Heartland trys to lift their profile via increased advertising? It will be interesting to see if the underlying debt position of the company remains under control.
SNOOPY
EBIT to Interest Expense Ratio HY2013
Quote:
Originally Posted by
Snoopy
Updating for the full year 2012 result
EBIT (high estimate) = $205.148m-$65.547m= $139.601m
Interest expense is listed as $121.502m.
So (EBIT)/(Interest Expense)= ($139.602)/($121.502)= 1.15 < 1.20
Result: FAIL TEST but an improvement from the HY2012 position.
Updating for the half year 2013 result. EBIT is not recorded in the released pdf. So we need to do some 'deconstructive analysis' on the released results to estimate what it might be. We start using the "interest income" from the income statement, and subtract from that "selling and administration expenses."
EBIT (high estimate) = $103.280m-$31.943m= $71.337m
Interest expense is listed as $56.250m.
So (EBIT)/(Interest Expense)= ($71.337)/($56.250)= 1.27 > 1.20
Result: PASS TEST (a first for HNZ)
SNOOPY
Customer Concentration Risk HY2013
Quote:
Originally Posted by
Snoopy
Customer concentration is of course an indirect measure of potential risk. Of more interest perhaps is 'real risk'.
Interesting reading from Note 32C in the Full Year 2012 accounts.
There is a large jump in Grade 6 categorized loans. Grade 6 is the 'monitor' category up from $16.3m to $62.9m. Grade 6 is the jargon used by Heartland when a loan is on the cusp of going bad. Obviously these loans have not gone bad at this point, and that should be emphasized. Nevertheless if even half of those loans did go bad it would wipe out a whole years profits. This is something that should make Heartland shareholders cautious. A call for new capital from shareholders is now officially an 'on the horizon possibility', even though Heartland have only said so indirectly in this obtuse way.
The half year report last year did not provide the same level of disclosure as the full year report. This has proved to be the case again in HY2013.
Under note 12 and as of 31st December 2012, the percentage of deposits from the Canterbury region has reduced from 42% six months previously down to 36%. Overall I see this as a good thing, even if some market share in Canterbury must continue to be sacrificed to improve the overall term deposit risk profile.
Note 17c re-emphasises that the credit provision as reached with RECL (the real estate credit limit mangement agreement) has been fully utilised. This in turn means any further writedowns will directly hit the HNZ balance sheet.
I get the impression that rebalancing the account risk is still a work in progress.
SNOOPY