Dividend Capitalised Valuation: Preamble 1 "Dark Clouds mass over the Heartland'
Quote:
Originally Posted by
Snoopy
If there is a case for investment in Heartland today, I feel as though it will be as a dividend play. So how does one fairly value Heartland from a dividend perspective?
Quote:
Originally Posted by
Roger
Roger here is referencing the 'Dividend Discount Model' for valuing shares which, according to investpedia, goes like this:
Value of Share = (Dividend per Share) / (Discount Rate - Dividend Growth Rate)
The reason why I value a share on dividends is that my alternative growth modelling looks to be unreliable. There are plenty of reasons why Heartland could grow that are well discussed here. But despite Heartland having a strategy and successfully executing it (so far) there are lots of things that could go wrong too, and these scenarios are almost never discussed: except in this post.
1/ UDC gets some Kung Fu fighting ability: Many assume that the acquisition of nearest competitor UDC by the Chinese HNA Group will see a mass exodus of UDC depositors and customers. It is very curious that HNA Group are prepared to stump up a premium to book value of $NZ235m, or 1.6 times book value at UDC's full year balance, just to watch such a disaster unwind. What never got mentioned is that ANZ has agreed to fund a loan facility for UDC so generous, that even if nearly all depositors pulled out before UDC was sold, none of the loans would be affected. Once sold, credit rating agencies will drop UDC to below invesment grade because the new parent HNA froup has a rating delow investment grade. But if HNA then chooses to finance the business using cheap Chinese money, the credit rating no longer matters. Dollars still talk in financial deals. Those people with loans on the UDC book may be offered a very low interest rate, undercutting the likes of Heartland. Heartland's loan book could collapse under relentless Chinese pressure.
2/ The Great Reverse Mortagage Reversal: Reverse mortgages are more attractive in an environment of rising house prices. I reckon that some of those who took out reverse mortages in the last two years in Sydney, Melbourne and Auckland will have more capital now than before (despite semi-punitive interest charges) they took out their reverse mortgage. But if property capital growth stalls, or worse, the housing market goes backwards, then those with a reverse mortage will see a double decline in value. Both from compounding interest AND the diminuition in value of their house security. I think reverse mortgage growth will be much harder in that kind of market.
3/ Cost Pressures: Heartland, despite their superior interest margins - a point often quoted here, are still behind the big banks in terms of 'Net Profit margin'. 'Net Profit margin' I take as:
'Net Sustainable Profit' / 'Gross Interest Revenue'
For example ANZ in FY2016 this was 22.8%, and Heartland was 20.1%. So the superior 'net interest margin' of Heartland was more than compensated for by higher costs in the other operating expenses of the business. Heartland is actually a 'high cost base bank' which is much smaller than the big four banks. Being small and high cost puts Heartland in a vulnerable position. This is why Heartland have steered away from competing head on with the big banks (a smart move) in teir earlier visions. But now Heartland are to move back into regular mortgages via their on-line platform. I predict Heartland will succeed, but only by whatever measure the big banks choose to constrain them to. I can't see this U turn back to the mortgage market ending well for Heartland.
4/ "The nicking of Heartland Niches." Heartland are proud to point out their loan offerings to SMEs, a neglected segment (so they say). But Westpac are also going hard after SME business. Likewise both Westpac and ANZ are investing in their own digital strategies going forwards. ANZ will lend against livestock and farm machinery directly (leaving farm land unencumbered) too. Heartland's unique offerings to the market, while not offered by every other bank, are far from unique. Heartland may be going after underserved market niches, but other banks are going after those niches too!
I am not predicting the demise of Heartland even if all of my above bullet points come to pass. I am suggesting that the future of 'Heartland banking' may be a lot more combative that some shareholders think. I would say a dividend growth rate of zero would be the appropriately conservative figure to put into any dividend valuation equation.
SNOOPY