Originally Posted by
Fiordland Moose
That article takes Jarden's research and the capital raising scenario they illustrated completely out of context, and a disappointing example of business journalism in my view. The additional equity noted in the report wasn't just for an acquisition of Avenue Bank (how could it, given if it went ahead, the outlay is only ~A$49m more and in theory could be funded through corporate debt through to retained earnings or simply a raise for $49m) but was the larger 100-150 equity requirement for a fast track growth scenario in Australia that see's HGH australian receivables & NPAT (and eps) grow significantly faster than under the current status quo.
Part of heartland's investment rational for the StockCo purchase was in their view a tangible pathway to triple Stockco receivables in the short/med term as historically its biggest constraint was a lack of funding capability due to its private ownership.
Jarden run a what if scenario, taking stockco, its broader australian reverse mortgage business, and avenue bank (which secures lower cost funding) into consideration, looking at what growth could be secured and what the attendant equity requirements might be (banking is a capital intensive business).
They present their base case to FY25 for the australian business (without Avenue bank or any incremental capital) and note within it both the NZ and AU businesses are well funded. but then they ask the question well what if HGH goes harder and actually manages to triple Stockco by FY25 (well not quite 3x, $373 FY22 stockco receivables to $1b), grow the reverse mortgage business a bit faster, acquire avenue bank which could deliver $20m in incremental cost of funding savings), and see what the differential is in funding requirement, NPAT and EPS.
AU Receivables
FY22 Base: Reverse $1.235bn, StockCo $373m, NPAT 96.1m, EPS 16.2c
FY25 status quo: Reverse $1.814bn, Stockco $416m, NPAT 124.8m, EPS 17.7c
FY25 growth case: Reverse $2bn, StockCo $1bn, NPAT 152m, EPS 20c
It's all back of the envelope stuff but if life worked out per the spreadsheet or close to it the incremental equity to support a growth case is clearly value accretive and deliver a high IRR / return on investment for shareholders on that extra capital.
It's disappointing the journalist made it read like that $100-150m was dead money. Avenue bank could be corporate debt funded (but would defeat the point), funded by retained earnings (would have an impact on growth rates and dividends), funded by equity for the A$49m expected purchase price, or a bigger raising could be sought to achieve faster growth rates in the existing core reverse mortgage book and stockco book.
Banking in particular is a balancing act and series of trade offs...growth consumes capital, the very heavy retail shareholder register demands dividends & prefers the status quo, but wants to see growth but howls at capital raising. Divy payout a bit high which reflects retail but DRP successful and capital raising by stealth. Personally if there was a growth case where incremental capital could be put to work that generated high returns I would be all for it, but I know many prefer the status quo and would only see it as dillutive...I think that's why HGH went out of its way to get some institutional investors in. Could be some disharmoney as the mix of shareholders change and macro sentiment sours over the next 18 months.
I look forward to that...the TA looked s**t hot on its way up to $2.60 (& thining fundamentals) which I thought was silly but apparently thats the best time to buy in. I look forward SP weakness and even stronger fundamental value as the price falls. More than happy to watch the squiggly line fall and as bottoms up pick up some more.