Buffett Point 2/ FY2016: Sustainable 'eps' trend
The trend below is required to track higher for five years with one setback allowed.
Financial Year |
Net Sustainable Profit (A) |
Shares on Issue EOFY (B) |
eps (A)/(B) |
2012 |
$26.606m + 0.72($5.642m + $3.900m) =$30.476m |
388.704m |
7.84c |
2013 |
$6.912m + 0.72($22.527m+ $5.101m)= $26.804m |
388.704m |
6.90c |
2014 |
$36.039m |
463.266m |
7.78c |
2015 |
$48.163m - 0.72(0.588m) = $47.743m |
469.980m |
10.2c |
2016 |
$54.164m - 0.72(1.136m) = $53.346m |
476.469m |
11.2c |
Result: Pass Test
One necessary hurdle has been lept over in a quest to see if Heartland is a suitable candidate to apply the Buffet growth model, as espoused in "The Buffettology Workbook" by daughter in law Mary Buffett.
SNOOPY
Buffett Point 3/ FY2016: Return on Equity history
The table is required to have an ROE figure of >15% for five years in a row, with one setback allowed.
Financial Year |
Net Sustainable Profit (A) |
Shareholder Equity EOFY (B) |
ROE (A)/(B) |
2012 |
$26.606m + 0.72($5.642m + $3.900m) =$30.476m |
$374.798m |
8.1% |
2013 |
$6.912m + 0.72($22.527m+ $5.101m)= $26.804m |
$370.542m |
7.2% |
2014 |
$36.039m |
$452.622m |
8.0% |
2015 |
$48.163m - 0.72(0.588m) = $47.743m |
$480.125m |
9.9% |
2016 |
$54.164m - 0.72(1.136m) = $53.346m |
$498.341m |
10.7% |
Result: Fail Test
Pre-empting the grizzlers, the thinking behind this test is that an ROE of 15% is well above the cost of capital of most firms. A lower ROE than this means that it is possible that some of the businesses under the Heartland umbrella are earning a return less than their cost of capital. This means that there is less certainty that capital in the future will be efficiently deployed, and consequently less certainty about the profit oulook. This doesn't mean that one should not invest in Heartland though. It just means that you should use a method other than the 'Buffett Growth Model' to evaluate the business.
SNOOPY
The Heartland hunger for new Capital
Quote:
Originally Posted by
Snoopy
1/ If you look at the EBIT to Interest Expense Ratio when Heartland was formed my post (8477) you can see that their position was very marginal back in FY2012/FY2013. The threat of a recapitalisation that would provide breathing room at a big discount to the current share price back then and since has been omnipresent.
2/ Despite bluster about capital returns over the last couple of years, the real situation required Heartland to make a cash issue of shares late in CY2016. A check of the constantly declining equity ratio (my post 8478) has hinted that eventually a recapitalisation was going to be required. Heartland got the recapitalisation plan away at a very good price. But that good price was never assured before the event.
Financial Year |
Number of New Shares Issued during FY |
Total Shares on the Books EOFY |
Net Money Raised from Shares Issued During FY |
2012 |
88.704 m |
388.704m |
$54.946m |
2013 |
0 m |
388.704m |
$0m |
2014 |
75,562 m |
463.266m |
$64.774m |
2015 |
6,624 m |
469.980m |
$9.163m |
2016 |
6,579 m |
476.469m |
$6.798m |
2017 |
13.659+ m |
499.165+ m |
$20.0m + |
Total Cash Raised |
|
|
$155.681m + |
For those who need some more convincing about what I am saying, the table above lays out the 'new capital' that has been poured into Heartland from its formation. Some years the new capital injection was modest, via the dividend reinvestment plan. Most years the capital required was significant. In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'.
In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things. Some of this 'new capital' is being put toward the digital strategy. The effectiveness of this deployment while promising is yet to be seen! Because of the nature of the growing Reverse Mortgage business this is likely to be cashflow negative until a steady stream of these loans starts to mature. So yet more capital will be required for a while. None of this is meant to be a criticisim of Heartland's strategy going forwards. I am merely pointing out the cashflow implications for the near and medium term.
Any readers still believe that Heartland has 'plenty of capital' and won't be requiring more?
SNOOPY
This one is about semantics
Quote:
Originally Posted by
Snoopy
Iceman. What I wrote was:
"In only one year was no new capital needed. By showing the whole picture, I am hoping to put the bed the idea that, for the ambitions that Heartland has, Heartland has 'excess capital'. "
"In all years since Heartland has become a bank (FY2013 onwards), Heartland has satisfied Reserve Bank requirements for capital. But having a buffer on the minimum capital required, and having enough capital to allow Heartland to realise their business ambitions are different things."
This last quote is exactly the same point as PT was making in his 'PPS'. I don't believe anyone reading that could interpret what I wrote as " HBL needed capital to survive "
SNOOPY
You can not cherry pick a little part of your entire post (including the quote and especially including the embolden parts) and try and wiggle out of it.
The semantics of your posts are unambiguous.
Best Wishes
Paper Tiger
This one is about taxonomy
Quote:
Originally Posted by
Snoopy
PT, if you really believe that, perhaps you might like to explain why back in FY2014 (the last reported year with a substantial increase in new capital and when the drp was operating) as shown in AR2014 (p20 'Statements of Changes in Equity') the new capital (including $48m worth of new shares issued as part of the "Seniors Money International" acquisition) along with $7.231m from the DRP are added up together when summing the 'Total Equity'.
Or in non-technical speak, how it is possible to add two things together to form one total when they are not the same class of thing?
SNOOPY
This one is definitely about taxonomy and we need to delve into classes and sub-classes.
Or maybe hierarchies would sit better in your mind?
But in this case we have equity and it's assorted sub classes: share capital, retained earnings and a positive plethora of reserves.
Let us ignore the glib 'if there are the same why are then on different rows then?' reply and let us follow the money.
It is after all, all money.
So where did the dividend reinvestment plan stuff come from?
From the dividends paid !
And where did the dividends paid come from?
From the retained earnings !
Read the table and you will also notice the morphing of many other sub-classes.
So maybe it is a bit of the old semantics as well then!
Best Wishes
Paper Tiger
This one is about wisdom & experience
Quote:
Originally Posted by
Snoopy
From an investments perspective there are two broad questions to ask:
1/ How well is Heartland performing?
2/ What level of risk is being taken to extract that performance?
To answer 1/ I use my 'Buffet Point' criteria. There is nothing weird or unusual about looking at 'Return on Shareholder Equity' and 'Earnings Per Share' as measures of performance. These are well established measurement yardsticks. However, it does not matter what the performance of the bank is if the risks taken to achieve that performance are so high that shareholders can expect 'an equity bail out' at the next broader financial market hurdle. And this is where all the rest of my tests on 'equity ratios' and 'liquidity' come in.
To directly answer your question I am not trying to 'prove' anything. My aim is to produce the information so that others can take it in and comment (or not) on what they see as any implications.
Ultimately it would be nice to know if Heartland is a good investment prospect or not, as well as have something more than 'gut feel' to back that up.
Given Heartland now have five years of solid results under their belt, it would be hard to disagree with that. But what does being a "good well run company" really mean? If the share price suddenly drops, does that mean the company is no longer well run?
SNOOPY
But your tests and/or your interpretation of the results are failing you Snoopy!
Are you sure that you are actually applying the correct tests in the correct way?
If the share price drops, all other things being equal, then you have a better risk/reward ratio for a purchase.
Best Wishes
Paper Tiger
This one is about it being complicated
Quote:
Originally Posted by
Snoopy
Because so much water has gone under the bridge...
...Given this, I am not even sure if the concept of "Growth Capital" being distinct from "Reserve Capital" has any meaning.
SNOOPY
There is too much equity, where you are not earning enough rewards;
There is too little equity, where you are taking too much risk;
and there is the Goldilocks zone :t_up:.
But that is just part of the story.
Best Wishes
Paper Tiger