Motor Vehicle Finance for FY2021f
Quote:
Originally Posted by
Snoopy
Prestige brands generally slow in sales during a recession though. So I am picking JLR sales might halve this calendar year.
So what will all this do to Heartland's financing of new vehicles? Well, Heartland's financial year ends on 30th June. Only three months of the year will be 'post lockdown', so things might not be as ugly as some think. Particularly as dealers look to quit excess stock with sweet finance deals. Bad for motor dealers but ironically good for Heartland,
The market is always forward looking though. So the real interest is, what will motor vehicle finance look like in FY2021? If you are Heartland, don't look in the mirror. You will see 'ugly'. If the base case for funding new vehicles is split for FY2020 45:45:10 between Holden:Kia:JLR (an educated guess) then FY2021 is likely to look like 0:50:5 on the same scale. That means new car financing down 45%.
So what does this picture suggest for profitability in FY2021?
As at December 2019 the motor vehicle finance book at Heartland was $1,124m. Let's guess new vehicle sales were $500m of that. So a 45% reduction would see a loss of:
0.45 x $500m = $225m worth of finance business in turnover.
Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:
0.15 x $225m = $34m
Of course the annual hit won't be this much, as finance typically has a three year cycle. So the FY2021 hit will be about 1/3 of that, $11.4m
I am guessing the FY2022 impact will be only half that in FY2021, $5.7m, but unfortunately the financing effect from FY2021 is cumulative into FY2022
Underlying profit was around $74m in FY2019 (a bit less in FY2020?). So it looks like new car financing alone will knock Heartland's profit down to just shy of ($74m-$11m=)$63m, or a 15% drop.
Quote:
Originally Posted by
Snoopy
Motor Vehicle Finance
My new vehicle funding scenario remains unchanged, I am going to add in a used vehicle funding decline of 10% (previously 0%). I estimate Heartland funded $1,248m - $500m = $748m of used vehicle sales in FY2019.
The average growth rate in the 'motor receivables' portfolio between FY2013 and FY2018 was 11% (November 2018 investor day presentation p45). By end of FY2018 Heartland accounted for 7.3% of dealer to public sales (p47). Management sees a real growth opportunity here. So I have pumped up my pre-Covid-19 base figure by 11%:
$1,124m x 1.11 = $1,248m
Quote:
A 10% reduction in sales equates to $75m. Again using a reference ROE of 15% from the FY2019 AGM presentation.
FY2021/2022: -$75m x 0.15 = -$11.3m
Because I am modelling finance deals with a three year life, this annual loss compounds.
The Motor vehicle finance book totalled $1,089m at EOFY2019, and rose to $1,124m at EOHY2020 before topping out at $1.126m (+3.4% for the year ) at EOFY2020. I was predicting no Holden sales for FY2021, yet there are still some Holden badged American products (and rebadged Asian built Isuzu utes sold as Colorado) hanging around the dealerships. Holden have told us sales will cease by calendar year 2021. So the new vehicle downturn is certainly coming for Heartland. The other mainstream new vehicle brand that Heartland fund vehicle purchases for is Kia. Year to date to the end of August 2020 they rank second in sales only to Toyota. So Kia is definitely a brand on the rise, with their top sellers being the Sportage (medium size) and Seltos (small) SUVs (source www.mia.org.nz).
I am reworking my estimated Holden:Kia:JLR sales split from FY2019 of 45:45:10, to 20:50:5 for FY2021. That represents a forecast sales decline of 25%. A 25% decline from the EOHY2020 sales figures, assuming new vehicles represented $500m of a total of $1,248m of all modelled vehicle receivables balances, represents a sales decline in dollar terms of:
$500m x 0.25 = $125m
Motor vehicle finance has traditionally had some of the best margins at Heartland. Heartland's AGM FY2019 presentation had an ROE north of 15%. In recessionary times I am going to stick to the 15% figure. This means the earnings that Heartland will miss out on due to plunging new car finance deals will be around:
0.15 x $125m = $19m
Of course the annual hit won't be this much, as finance typically has a three year cycle. Existing finance deals signed over FY2019 and FY2020 will continue on previously arranged terms. So the FY2021 hit will be about 1/3 of the life of contract total, about $6.3m.
I am guessing the FY2022 impact will be more or less the same at $6.3m, but unfortunately the financing effect from FY2021 is cumulative into FY2022 for a total effect of $12.6m.
Used vehicle sales for the whole NZ second hand market are down 6% for the calendar year.
https://autotalk.co.nz/news/the-boun...trong-recovery
However, I am still expecting used car sales to weaken further over FY2021 so I am sticking to my previous modelling framework.
SNOOPY
Harmoney & Other Consumer Lending: FY2021f
Quote:
Originally Posted by
Snoopy
Harmoney and Other Consumer Lending
The main profit that Heartland makes from Harmoney is not from the fraction of the Harmoney NPAT that they are entitled to via their partial ownership of Harmoney. No, the profit comes from the provision of funds to Harmoney to run their loan book. If Heartland fund the loan book to the extent of their shareholding, then Heartland's share of this receivables book amounted to:
0.131 x $367m = $48m
At a 15% return on this loan money, this level of lending would produce:
0.15 x $48m = $7.2m of annual profit.
I predict that Harmoney will be severely affected post Covid-19 and will struggle on at half their current size. That corresponds to a $7.2m /2 = $3.6m profit hit per annum.
"Harmoney & Other Consumer Lending" had an OK year over FY2020 (p19 FY2020 presentation, PR2020) with the loan portfolio up 2% to $211m compared to FY2019. I am unclear as to exactly what has happened here. From the information in the link below:
https://www.interest.co.nz/news/1067...gging-consumer
Harmoney are now a much smaller business. (Loan Book down from $367m to just $129m). Heartland own just 11.85% of Harmoney. (source NZ Companies Register below)
https://app.companiesoffice.govt.nz/...2BBiKNrJq6AAAA
But 'ownership' and 'providing capital with which to make loans' are two different things, And I think Heartland do both of those things for Harmoney.
In direct contradiction to the 'interest.co.nz' Harmoney results reference above, p19 of PR2020 shows "Harmoney receivables increasing to $199m." Who can explain that discrepency? Whatever the explanation, it certainly sounds like the Harmoney loan book is being incorporated into the Heartland loan book. But the reason for doing that is another mystery in itself (question posed below). Despite the slightly bullish tone on p19 of the AR2020 presentation, I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.
The FY2020 presentation for Heartland, from pages 14 to 21 inclusive, gives the full whereabouts of Heartland's loan book:
1/ Australia,
2/ NZ Reverse Mortgages,
3/ Open for Business (O4B),
4/ Business Intermediated,
5/ Motor Finance,
6/ Harmoney & Other Personal Lending,
7/ Livestock Funding, and
8/ Relationship.
All of these categories come to a grand total of $4,610m in receivables. For comparison, if we go to the FY2020 accounts and add up the receivables on the balance sheet, I get $4,584m. There is a small difference of $26m between these two comparable totals, but I judge this not to be material (even though I can't explain it). So it does definitely appear as if Harmoney loans are listed in the 'Finance Receivables' in the Heartland balance sheet. However, a word search for Harmoney in the FY2020 accounts comes up blank. So I am not clear where Harmoney fits into the Heartland 'Finance Receivables'. One possibility: If I look in the Segmented Analysis of the AR2020 p98, we see the 'Other Personal' category having $214.759m in assets. This is similar to the $211m in assets figure listed on p19 of PR2020 for 'Harmoney and Other Consumer Lending' (again I can't explain the small difference).
I thought I might find Harmoney under note 11 'Investments' (AR2020 p106) under the equity sub header. But if Harmoney was an 'investment' based on the just 11.85% shareholding that Heartland held, then why have the Harmoney receivables -apparently - been consolidated inside the Heartland receivables? I don't follow how Harmoney has been treated in the Heartland accounts. So if anyone can unscramble it for me I will be all ears.
Heartland has created an 'overlay', in effect an extra bad debt buffer, to allow for as yet unspecified expected negative downstream effects of Covid-19. The bulk of Heartland’s $9.6m pre-tax overlay has been apportioned to the Consumer and SME portfolios. We can take from this that if problems do emerge over FY2021, then this 'Consumer' section of the loan book is more than likely where a hit will be felt.
Despite the slightly bullish tone on p19 of the AR2020 presentation (PR2020), I don't see sufficient information to override my (previously stated in the quoted bubble) bearish outlook for this sector.
SNOOPY