Hunger for New Capital Increased
Quote:
Originally Posted by
Snoopy
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?
We are getting to the end of FY2017 capital raising now, with just the DRP for the current dividend to go. But with the (surprising) 'increase in new capital' asked for from existing shareholders, and last years placement put to bed, here is my best update of the capital raised subsequent to Heartland being formed. This time I will leave out FY2012, because that capital raising was all about shoring up the company's position 'at birth', and was not part of any future growth initiatives. For comparison, I have added a column showing the dividends declared during the year, before any net cash reduction as a result of the dividend reinvestment plan.
Financial Year |
New Shares Issued during FY |
Total Shares on the Books EOFY |
Net Money Raised During FY |
Dividends Paid |
ROE |
2013 |
0 m |
388.704m |
$0m |
$13.951m |
7.2% |
2014 |
75,562 m |
463.266m |
$64.774m |
$19.930m |
8.0% |
2015 |
6,624 m |
469.980m |
$9.163m |
$30.188m |
9.9% |
2016 |
6,579 m |
476.469m |
$6.798m |
$37.690m |
10.7% |
2017 |
30.973m+ |
512.902+ m |
$45.277m+ |
$39.485m (f) |
tbc |
Total Cash Raised |
|
|
$126.012m + |
Total Cash Returned |
|
|
|
$141.244m |
(f) indicates forecast result.
This shows that the sum of those shareholders who have taken up their dividends as DRP shares and contributed to the cash issues from FY2013 to FY2017 inclusive, the total sum contributed amounts to 89% of the dividends paid out. That figure is sure to rise to over 90% once the DRP contributions from this months dividend are added. This is not an unexpected position for a 'growth' company. But the question is, what return on equity do shareholders receive on these new/reinvested funds?
Unfortunately this is difficult to figure out. Heartland provides a 'segmented result analysis'. But the segments keep changing. This from p45 of AR2016:
-------
Segmental analysis
Operating segments
The banking group operates predominantly within New Zealand and comprises the following main operating segments: Households, Business, Rural
During the period ended 30 June 2016, the following changes were made to the banking group's operating segments:
- a business unit previously reported in the Household division was moved to the Business division.
- lending through Harmoney, which was previously reported in the Business division, was moved to the Household division.
- the non-core property segment was moved into the Business division.
---------
Such trifling details that obscure how the new investments are doing are of little concern to the Heartland faithful. But they are a big concern to a potential investor, outside the tent, like I am. We can however work out the overall return on shareholder equity in the whole company. See the last column in the above table. The ROE figures are improving, but they are consistently below average for NZX companies in general and certainly below average for banks. And remember, I am talking about a five year period that has generally been favourable for banks and finance companies. What will happen when a 'below average' Heartland faces some headwinds?
To summarize what we have here in Heartland is a company that is very hungry for cash, and consistently invests this cash in below average business units. How can this be a recipe for long term shareholder wealth? I suppose one day all this business reinvestment might pay off and my lack of faith in Heartland will make me look like a fool. But right now, there isn't shred of data that shows that Heartland can outperform any other bank in the medium to long term. I think investment in banks can prove rewarding. But I prefer to invest in banks that are at the top of the class, not down there at the bottom!
SNOOPY
What is the real growth rate for Heartland? (FY2015 to FY2017 perspective)
Quote:
Originally Posted by
Snoopy
To work out what that is, I have constructed a table below.
One of the best ways to look for growth rates is look at the rate of growth in dividend payment. A dividend is the amount of cash that management will pay out, taking into account earnings that must be retained for a company's on-going growth. I have represented this in the table below (condensed to the bare bones from a previous post).
Quote:
Year |
Actual Dividend |
FY2015 |
$30.516m |
FY2016 |
$38.118m |
FY2017(f) |
$43.597m |
The actual dividend increase over the three years total (two years incremental period) is projected as:
$43.597m/$30.516m = +42.87%
Another way to express this is by way of compounding single year growth
g^2 = 1.4287 => g = 1.195 => 19.5% compounding annual growth.
Note that this figure is very different to my modelled growth rate below:
Quote:
Now we can calculate the incremental profit growth percentage:
$5.732m / $112.233m = 5.112%
The average annual growth rate, lets call it 'g',
Solving for 'g' yields an annual growth rate of 2.524%
So how do I explain modelling a dividend growth rate of 2.524%, when the actual dividend growth rate was 19.5% over the study period? The answer is that the 19.5% figure assumes that all of that growth is 'real absolute growth'. My modelling is assuming a much more modest business cycle picture, which nevertheless is underpinned by a long term rising growth rate of 2.524%. Or put another way, the 19.5% of annual dividend growth observed is made up of 2.5 percentage points of 'real underlying growth' and 17% of 'business cycle growth'.
Now I know that this interepretation of the dividend growth will outrage the enthusiasts. One problem is that 'modern Heartland' (including Seniors) has only been operatiing since the FY2015 financial year. Trying to extrapolate what might happen over a full business cycle is fraught with difficulties. So I may yet have to eat my hat over these figures. But I put it to 'the enthusiasts' that the data to support the alternative view (that all growth is real growth) is very questionable. My reasons fro saying that are articulated in my post 9131 'Hunger for New Capital Increased'. When modelling a situation like this, with lack of clear evidence either way, I tend to go for the conservative assumption.
So to summarize, the investment case for Heartland depends on your beliefs
Scenario Case 1/ (Conservative: Generally Cyclical share with small underlying growth): If I invest according to the conservative assumption and I drastically underestimate the growth, then I get the growth for free.
Scenario Case 2/ (Go Go Growth: All growth is real and it will continue at current rates for many years) If I invest according to this scenario and growth falters, then I face a 'cut in dividend', a concommitant cut in 'company market valuation 'and another cut because of 'market multiple deflation'. This three way hit could be pretty ugly.
I do not find the evidence for Scenario Case 2 to be convincing. My investment target range assuming Scenario 1 is below $1.42 (refer to my post 8635 on this thread). So I will not be investing in HBL at this time.
SNOOPY
Laugh ? I nearly injured myself
Why I have had to put Snoopy on the Ignore List:
https://www.youtube.com/watch?v=lF5lCsCxZjQ
Best Wishes
Paper Tiger