The share price is currently $1.71...,
which means he is still wrong.!!..lol.
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The share price is currently $1.71...,
which means he is still wrong.!!..lol.
There is a tendency to think of Heartland as a small nimble bank able to capitalise on new opportunities faster than their competitors. The 'digital strategy' has great potential to cut costs from parts of the system and boost ROE. But how stable is the 'core business base' that is the springboard for Heartland's new initiatives? I discuss this in my post 8524 "Strong Market Position Discussion : FY2016". The question becomes will the new initiatives create enough improvement to cope with some legacy business decline, as well as satisfying shareholder needs for growth? I discuss this in my post 8532 "Strong Market Position FY2016: Further Discussion and Conclusion".
My prediction was for a total loan book growth of $3.7m. Not much when the total loan book size was $628m (actually <1%)! While there is a good chance Heartland may do better than this, a prudent investor would not invest on the basis of all ducks lining up. I don't see a compelling case for reinvesting any of my ANZ and WBC funds into Heartland.
SNOOPY
My price range looks at the expected price deviations you might expect over a 5 to 6 year period trading on the market. This is why it is so broad. I can narrow my range down by looking at where the price might be 66% of the time if you like. That would be a 10% deviation around the average (another rule of thumb).
Bottom of Business Cycle Average Top of Business Cycle 66% Percentile Price Range $1.28 $1.42 $1.56 95% Percentile Price Range $1.14 $1.42 $1.70
As a share investor, my aim would be to increase my holding when a share is in the bottom half of its trading range and reduce my holding when trading in the top half of the trading range.
Of course:
1/ Just because a share is in the top half of the trading range, that doesn't mean the price can't go higher.
2/ Just because a share is in the bottom half of the trading range, that doesn't mean the price can't go lower.
I am not going to pretend I can pick short term price flucuations. I am trying to take an overall longer term wider view. Not pick an optimim price for a particular trade, but buy in at a price that should provide superior returns in the medium to long term. As for what the share price is doing 'right now', I really don't care.
SNOOPY
No it just means the price has gone into my 96% percentile range, up from the 95% percentile range. A 1c variation in share price is immaterial and well within what might be expected of 'market noise'. It is not worthy of comment, and I sentence myself to one lashing for doing so.
SNOOPY
My $1.42 can probably be best thought of as the price I might pay for shares if there was no public market for Heartland shares and the whole group was privately owned. Bring on a public market for shares. Then any share becomes subject to the daily vicissitudes of interest rates, what happens to other banks, and even the rantings of Donald Trump. So if you see Heartland trading at $1.70 (the price as I write this) this could be because:
1/ there is underlying net growth that I have not incorporated in my modelling. OR
2/ in a time of very low interest rates, new shareholders are prepared to accept a lower yield than myself, because someone want's an instantaneous yield 'now', whereas I am after a business cycle yield in a climate where dividends can both rise and fall over time.
In my judgement, there are no public announcements yet that suggests the reason is 1/
On the second point 2/, I refer to my post 8629 "Preamble: The Discount Rate Factor". This shows I am working on an 'acceptable' gross yield of 7.5% at my $1.42 valuation. If someone else is prepared to accept 6.5% then the fair value share price changes as follows:
$1.42 x (7.5/6.5) = $1.64
Perhaps they are willing to accept a 6% gross yield? In that case the share price such an investor might pay becomes:
$1.42 x (7.5/6.0) = $1.78
None of these share prices predictions are 'right' or 'wrong'. They are simply reflective of the gross yield the investors of the day are prepared to accept. I won't accept a gross yield, on average, of less than 7.5% given the inherent risks of a second tier financial company. So my mean business cycle valuation won't be changing from $1.42. It follows that I have absolutely no interest in acquiring shares at $1.70, even if I think in the short term the share price might go higher. In casino terms that would be akin to 'betting against the house' as the odds stack up more and more against you. It doesn't preclude a short term win. But in the medium to long term, it is a losing strategy.
SNOOPY
They're good value compared to their peers Snoopy. I'm sticking with my peer group comparison of $1.83 although note that BOQ and BEN have had some nice moves up last week so might have to review that when HBL gets to $1.83.
An update on how the half year has shaped up to the previous full year result. The information below has been extracted from the half year report for FY2017.
https://shareholders.heartland.co.nz...port-final.pdf
Our test requirement is:
Highest single new customer group exposure (as a percentage of shareholder funds) <10%
Regional Risk
From reference Note 12b, the greatest regional area of credit risk in dollar terms is Auckland, with $838.352m worth of assets. This represents:
$838.352m/ $3,718.790m = 23% of all loans
So 'normal service has resumed' with the former concentartion champion, 'Rest of the North Island' back down to :
$822.142m/ $3,718.790m = 22% of all loans.
Auckland at 23% of all loans is high, yet still below historical concentration levels. But I don’t rate that concentration of loans in Auckland as being an issue. Particularly so when ‘Auckland’ is such a varied catch all group. Does 'Auckland' capture the Harmony investment stake too? Anyone know?
Industry Group Risk
From reference Note 12c, the greatest 'business group' risk in dollar terms is Agriculture, with $712.072m worth of assets. This represents:
$712.072m/ $3,718.710m = 19% of all loans
This is slightly up on FY2016, when agriculture was
$628.202m/ $3,461.292m = 18% of all loans
These figures are quite high and continue trending in the wrong direction for HY2017. Given that Heartland is nominally a specialist agricultural lender I wouldn't be too concerned. But if agricultural loans go above 20% of the total (or dairy representing about half the agricultural loans above 10%), then I would sound an alarm bell. How much compounding interest without any cash payments can Heartland take on the books? A 13% jump in the value of that rural portfolio in just 6 months is not insignificant. This situation will need careful watching when the FY2017 result details are released IMO.
SNOOPY
This sounds like 'greater fool' investing to me. There is no need to evaluate the true worth of the investment if 'the rising trend' means there is always someone else to sell to. No doubt there is significant money to be made when an investment goes from being 'plain overvalued' to 'incrementally overvalued'. The trick to making money is to make sure you don't become the 'greatest fool'. Good luck.
SNOOPY
It's an earnings growth story Snoopy. Sooner or later it'll hit $1.83 with organic earnings growth. With a circa 7% gross dividend yield I am happy to take a patient approach now that dairy has recovered. You can't completely discount the possibility of a credit rating upgrade at some stage either which might lower the cost of their funding somewhat.
An awful lot of quality stocks on the NZX are currently trading within a yard or two of a fairly fulsome price...might as well own the ones that pay a decent dividend yield then :)
Spoken as though the core position is solid and incremental growth is a given. I think incremental growth is a given (switched on management look to have a credible growth strategy). But I am not so sure how solid that core of earnings really is.
Heartland keep booking profits on their dairy loans, but has dairy really recovered? Agricultural loans were $628.202m at last full year balance date (30-06-2016) and six months later 31-12-2016) had grown to $712.072m, a rise of 10.4% in just six months. How much interest was actually repaid over that period and how much was capitalised and booked as profit?Quote:
With a circa 7% gross dividend yield I am happy to take a patient approach now that dairy has recovered.
From the HY2017 interim report
"Trading conditions for Heartland’s dairy customers improved over the course of the reporting period, with farmers enjoying increases in payments from dairy companies. Dairy customers have generally responded (but with some exceptions? Snoopy edit) well to the difficult trading conditions over the past two years, with most customers managing to significantly lower their operating costs, and where necessary, to consolidate their financial position."
That last bit in bold reads like the bank has taken out their whip.
Yes a credit rating upgrade wouldn't surprise me, particularly when Heartlands own ABCP Trust is already on an A+ rating. And yes the dividend while it lasts will support the share price. As I said in another post" the risk profile gross return you are a shareholder might expect, will determine the share price you are prepared to pay.Quote:
You can't completely discount the possibility of a credit rating upgrade at some stage either which might lower the cost of their funding somewhat.
An awful lot of quality stocks on the NZX are currently trading within a yard or two of a fairly fulsome price...might as well own the ones that pay a decent dividend yield then
SNOOPY
Heartland is not shy about raising new capital. Subsequent to EOHY2017 they have raised a lot more new capital with an issue of $20m in new shares in New Zealand and the issue of $A20m of capital notes in Australia. But leading up to the latest reporting point, it is apparent that the balance sheet is already being worked harder. The following information is taken from IFR2017 and AR2016.
Snapshot Time Shareholder Equity {A} Finance Receivables {B} {A}/{B} EOFY2015 $480.125m $2,862.070m 16.8% EOHY2016 $485.688m $2,928.621m 16.4% EOFY2016 $498.341m $3,113.957m 16.0% EOHY2017 $528.002m $3,334.800m 15.8%
IFR2017 contained the following guidance on future capital use:
"Moving forward Heartland intends to take a more dynamic approach to capital management, in the same way that the larger banks operate, holding a more efficient level of capital and approaching the market to access capital through multiple issuances that are timed and sized to meet its capital needs."
Looks like lots of opportunities to buy discounted shares and/or bonds will be available to shareholders in the future. That should be enough warning for any shareholder today to wait for some of those new cheaper shares if they wish to increase their holding, rather than pay 'top dollar' on the market.
SNOOPY
No reason I can see why the dividend story shouldn't continue. Just keep tapping keen new investors for fresh capital Tier 1 and Tier 2 to fund organic growth and pay out about 70% of net profit as fully imputed dividends. I can't see any issue with the continuity of that. Everyone loves a good growth story.