RB Straight Jacket still on until 2022 - did I read ? ;)
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Pretty sure it will hit $2 soon
Decent trading update today that was in line with my thinking. I am looking for net profit in the early $90's million range for FY22 which gives them an eps of approx 15.8 cps and am hopeful the economy will be in a strong recovery and am looking for a recovery PE of approx 14.5 times earnings (which is the average of where the peer group I follow on the ASX is currently trading).
I am hopeful of a target price one year hence of ~ $2.30. The most obvious risk to that is another / more Covid lockdown(s) so the current price probably quite fairly reflects the potential risks and rewards.
Welcome back Beagle!
Jenny Ruth has a nice warm fuzzy piece on Heartland in BusinessDesk
Starts off -
It's always a dangerous thing to bet against a company with an established track record of doing what it says it will do.
Last December, Forsyth Barr analysts clearly didn't believe the message Heartland Group gave the annual shareholders' meeting that the company was tracking ahead of expectations.
Heartland has just proven them wrong in the best possible way; it raised its full-year earnings guidance after reporting it had 75% or more of the higher annual forecast under its belt from the first nine months.
And latest update this morning. I do note that they have revised their target price upwards still Underperform.3Q21 Update — Expensive at Current Levels
UNDERPERFORM
Heartland Group Holdings (HGH) has reported an unscheduled trading update for the nine months to 31 March 2021,
citing supportive economic conditions and modest receivable loan growth in the Motor, Reverse Mortgage and Business
Intermediated divisions. Guidance for FY21 was lifted by +2% at the mid point to NZ$85m–$86m (vs. our prior
expectations of NZ$82.2m) from prior guidance of NZ$83m–$85m. HGH's cost to income ratio was reported at 44.1%
(-3.2% on 1H21), its impairment ratio was 0.27% (+0.17% on 1H21) and receivable loan growth was up +3.4% on 1H21.
Going forward, we remain unconvinced that HGH can generate a long term return on equity in excess of its cost of capital
given its sub scale, higher risk profile, lower quality loan book and lack of competitive advantage, and are yet to see the
benefits of its digital strategy materialise. Given a recent rally in the stock price, we retain our UNDERPERFORM rating.
What's changed?
Modest 3Q21 receivables loan growth
Receivable growth of +3.4% in 3Q21 was driven by increases in its Motor, Business Intermediated and Reverse Mortgage books,
highlighting favourable category exposures. Repayments in 3Q21 were lower than 2H21, having normalised post COVID-19
disruptions. We expect the motor division in particular to continue to perform strongly in 4Q21, given healthy domestic demand.
Residential mortgages — a change in approach?
HGH is looking to build upon its small residential mortgage book and compete with large International banking peers. At this stage we
remain cautious regarding the opportunity for HGH given 1) the slim margins generated with a product yield starting from 1.99%, 2)
the highly competitive nature of residential mortgages in the New Zealand market, and 3) the brand power behind competing
Australian banks. However, if execution is successful, we note a greater return on equity can be generated given the lower capital
requirements needed for a residential mortgage product vs its current product mix. The company currently has ~NZ$30m of
residential loan receivables (0.6% of its total loan book).
Valuation
HGH and Australian banking peers have re-rated strongly with initial fears of a severe downside economic scenario now subsiding.
With the stock trading on a P/BV of 1.15 and generating a ROE/COE of 1.04 for FY21, using a variant of the Gordon Growth Model we
derive a target price of NZ$1.79, retaining an UNDERPERFORM rating
Forsyth Barr have been consistent with their negativity I will give them that but they have also been consistently very wrong. Their forecasts earlier in the year were wildly different to HGH's own forecast, (and drew quite widespread derision on here by many experienced investors) and have been proven to be dramatically wrong.
HGH is looking to build upon its small residential mortgage book and compete with large International banking peers. At this stage we
remain cautious regarding the opportunity for HGH given 1) the slim margins generated with a product yield starting from 1.99%, 2)
the highly competitive nature of residential mortgages in the New Zealand market, and 3) the brand power behind competing
Australian banks. However, if execution is successful, we note a greater return on equity can be generated given the lower capital
requirements needed for a residential mortgage product vs its current product mix. The company currently has ~NZ$30m of
residential loan receivables (0.6% of its total loan book).
Valuation
From what Jeff Greenslade said some time ago was it was a very easy product for them to do,so why not do it.?
Very small add on to HGH.
No big deal.Bit like a supermarket having lollies at the check outs.
Crux of Forbar's valuation is based on these two statements -
Going forward, we remain unconvinced that HGH can generate a long term return on equity in excess of its cost of capital given its sub scale, higher risk profile, lower quality loan book and lack of competitive advantage,
and
With the stock trading on a P/BV of 1.15 and generating a ROE/COE of 1.04 for FY21, using a variant of the Gordon Growth Model we derive a target price of NZ$1.79,
Generating returns in excessive of ones cost of capital is the foundation of corporate finance and in the long term a company's value is generally determined by that metric - rather than the cheats way of using PE ratios etc