Are those the SMEs that Jeff has skillfully shepherded over to the IRD loan scheme?
SNOOPY
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Might be something in here worth getting your snout into. https://www.harbourasset.co.nz/resea...age-deferrals/
While your sell decision was probably made long before Covid-19 arrived on the scene Cyclical, your assessment of $1.27 as 'fully priced value' may yet prove correct. What I see going forwards is a fairly dull finance company, a bit more risk averse than in the past and consolidating around their reverse mortgage offering. Oh and rural lending will just 'chug along'. I see SBS entering the REM market in NZ as adding credibility to the Reverse Equity Mortgage business model. I don't doubt the difficult position of many small businesses throughout NZ. But new small businesses will spring up and someone has to fund them. I don't want to bang the same drum endlessly. But I think it might be instructive to see my three 'future scenarios' stacked up alongside each other.
Three Profit Forecast Scenarios Pessimistic View (Post 13411) Middle View (Post 13429) Optimistic View (Post 13438) FY2021 FY2022 FY2021 FY2022 FY2021 FY2022 Baseline Reference Profit $74.5m $74.5m $74.5m $74.5m $74.5m $74.5m Reverse Mortgage Adjustment $23.7m $36.8m $33.0m $51.8m $54.1m $87.3m Motor Vehicle Finance Adjustment (New) ($11.4m) ($17.1m) ($11.4m) ($17.1m) ($11.4m) ($17.1m) Motor Vehicle Finance Adjustment (Used) ($11.3m) ($22.6m) ($11.3m) ($22.6m) ($11.3m) ($11.3m) Business Finance (Part 1) O4B Adjustment ($6.3m) ($3.6m) ($5.3m) ($2.1m) ($5.3m) ($2.1m) Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment ($15.5m) ($15.5m) ($15.5m) ($15.5m) ($10.9m) ($5.4m) Rural Finance Adjustment $0m $0m $0m $0m $0m $0m Harmoney and Other Consumer Lending Adjustment ($3.6m) ($7.6m) ($3.6m) ($3.6m) ($3.6m) ($3.6m) Total Forecast NPAT $50.1m $44.9m $60.4m $65.4m $86.1m $122.3m No. Shares on Issue 581.0m 581.0m 581.0m 581.0m 581.0m 581.0m Earnings Per Share 8.6cps 7.7cps 10.4cps 11.3cps 14.8cps 20.1cps
In the middle case, $1.27 would represent a PE of 11 by FY2022. That might be as good as it gets for the next few years. Yet a dividend of 10cps would be a gross dividend yield of 11%. That has be be pretty attractive against getting less that 2% in a term deposit.
For nztx and Beagle, I am forecasting a 'total profit hit' on business loans to be $19.1m (pessimistic), $17.6m (medium) and $7.5m (optimistic) by FY2022. So I am not trying to downplay your concerns. - they are real.
SNOOPY
I hereby declare author Harbour Asset's Simon Pannet as an 'honorary Beagle'. That is a very good bit of sniffing!
Pannet is talking about 'more that 10%' of SMEs requiring an 'interest holiday'. In my 'middle scenario' I am talking about a 15% reduction in direct to customer 'Business Relationship' lending combined with a 10% reduction in lending through downstream 'Business Intermediaries' lending. This looks to line up with Pannet's thinking.
"How those borrowers restart their payment habits will have a material bearing on banks’ earnings."
I am assuming in my Heartland modelling that they will not restart payments at all. Between 10% and 15% of loan revenue will be permanently gone. Too pessimistic?
" are more interested in the potential for losses from the small business sector, especially in light of the data for Australian banks which shows that 16% of bank loans to Australian SMEs remain on deferred terms"
The Australian position, if you include Melbourne, is likely to be worse than NZ. So from an investment perspective, I am happy with my modelling of between 10 and 15 percent of SME lending (in my dominant medium and pessimistic scenarios) in NZ going to the wall. I am not happy about what happens to those individual business owners of course!
My $1.18 median buy price for FY2021 looks to line up with Harbour Asset Management's dark assumptions. So I have no regrets about purchasing HGH shares at that $1.18 price I did.
SNOOPY
We must be aware of the ripple effect.
Two I know the history of.
1] Biggish motor repair business went into liquidation, after their major client went broke.
2] Auckland book distributor told me, that year's profit had gone, after two very large book shops went broke,owning him far to much.
Snoopy.Take a walk down to South City, and tell me if you think any shop, other than The Chemist Warehouse ,is profitable, and will still be in business this time next year.Same with "The Strip" bars.[Hate to think which bank financed their fit outs,] Check out Westpac Centre while you are there.First floor empty,Second floor empty,however Third floor has a tenant.
Eastgate is a disaster,Barrington has more empty shops,Northlands and The Palms have that decay look about them.
Job losses have yet to begin.Very few jobs advertised,and I doubt any bank is keen to help new businesses.
Trust Chris Lee does not mind me taking the following out of his this week's taking stock.
"As the stresses of Covid-19 lead to hardship or losses, weak, unfit, improper people will cover up their errors or misdeeds, rather than accept the responsibility of fixing the problems."
"Selfish, greedy people always try to avoid accountability, and will take risks with other people's money to evade detection. Their backbone is amoeboid."
Talk on the news tonight (if Auckland goes into a protracted lockdown) of Grant Robertson thinking of another extension to the wage subsidy program. Just keep on with the stimulus and printing money...what could possibly go wrong :eek2:
My sense is this virus is a really big problem that's going to come back and bite over and over and over again. My nose for trouble is telling me there's a heck of a lot coming. I hope I'm wrong.
To me Snoops me ol mate. Your optimistic view suggests you are fond of smoking a certain substance that we're supposed to be voting on whether to legalize or not.
Its fantasy land stuff mate, sorry, but I have to call it as I see it. There is no way in the world that's going to happen. I think your mid point scenario should be your optimistic one and your pessimistic scenario looks most realistic to me.
HGH currently trades a little over 1.1 times book value. I think that's about right at present but the risk is very much weighted to the downside if Covid bites over and over and over again...and I think it will. What I have seen at the coal face of the effects on my small client base deeply concerns me.
This dog is very glad he is close to retirement and has buried an ample supply of bones.
Maybe a Mars colony isnt such a bad idea.
In consideration of that -- Take II:
The Yanks will probably get there first, along with their special strain of the Trumped Trumpet mutated C-19 going along for the ride to see if mutates further ;)
Of course NASA wont admit up to the fact, The US Military will eventually disclose it was new form of warfare deterrent in case the Russians or Chinese try anything fancy..
Thanks Snoopy for your pointing out of these factors
- The nature of impairment may not necessarily fit into individual set reporting periods however.
- Most banks also carry (I understand) a general provisioning - so actual Loss would have to be above that general provision.
- A lot will depend on spread of that business lending exposure, how badly affected Borrowers were , security held, (if any held) & coverage for borrowing out there.
- The bank may also 'roll over' a certain amount presumably capable of being brough back from the cliff into new lending (not unheard of either - is it ?)
- Actual Losses (and any recoveries) may come into a number of periods forward
I remain quietly confident that HGH are actively managing their lending exposures. Even though the market may generally be exhibiting some mark downs and overly cautious tones in the current economic times..
To what extent do current market risk factors exceed those of pre Covid 19 times - that aren't 'insured by Govt guarantees on certain C-19 lending' and secondly usual general provisioning ; thirdly not already provided for in earlier periods ?
I'm picking that most banks have pulled their horns in on new lending, even with the Robertson Guarantee being biffed out into the financial markets -- we all have seen commentary on this & how little was utilised in recent past.
Granted - current times have allowed higher Lending % Margins in Lower Depositor rates prevailing now
Nevertheless going forward, any Losses take a lot more Lending activity & revenue thereon to recover now
Be fearfully when people greedy ..be greedy when people are in fear....
E koro buffet bought in heaps of Bank of America....I think HGH is a good buy at current SP....60c off the current high....
E koro Orr also begging banks to lend out businesses and RNZB will back the banks
I may have more to say on your post later nztx. But for now I need to make an important distinction about talk on the future of Heartland. For Heartland to continue to prosper:
1/ Heartland needs to have an enduring ongoing operational model that works in tough times.
2/ Heartland needs to have sufficient capital to back up their loan book.
My comments of recent days have all been related to to point 1, not point 2. I am not forecasting any operational losses going forwards. If a 'loan market sector' can't be managed on a daily basis to be 'operationally positive' then Heartland should not be in it at all. I have no concern that Heartland have any unsustainable business sector models going forwards, except perhaps their little adventure into 'Harmoney'. This doesn't mean no more losses for Heartland going forwards. Sudden macroeconomic events can change sector outlooks in a way that cannot be foreseen by those working day to day at the coal face. But these events cannot be forecast because they are by their nature 'sudden' and 'unexpected'.
Right now Heartland has the big tick from me on point 1. But that doesn't mean I see Heartland getting back to the glory days of the share price approaching $2. I would be happy with the Heartland share price appreciating another 10c or so over the next year then holding that level for five years. I think that in Covid-19 times we need to suspend previous thoughts on share price levels we think of as 'normal'. Holding such a share price level of just shy of $1.30 will depend on the resumption of dividends. Heartland have built up a strong record of paying strong dividends so I do think dividends will be back.
Turning to point 2 which I have discussed before, albeit not recently, I think any new investor in Heartland today should come on board in anticipation of a capital raising. All the banks grizzled when the new ECL (Expected Credit Loss) system for managing the loan book was introduced last year. They said the provisioning was too high. They seem to have changed their tune in recent months though! I expect much of this new higher 'general provisioning' will have been eaten into. Yet, and this is the bit I am unsure about, I think the ECL rules will demand new even higher levels of provisioning to be made, even though there is no market evidence today that such extra provisioning will be needed. The new provisioning will be required for statistical probability reasons. That means frighteningly poor headline profit figures for FY2020 for almost all financial institutions, even if the underlying operational business model is sound. So despite my recent share purchase, I am expecting to have to stump up for a Heartland cash issue at some point. And the Heartland shares I buy in that will almost certainly be cheaper than those I bought on market this week, But then again I could be wrong and Heartland may get a tier 1 bond issue away to shore up their capital position. I am not saying that around $1.18 is necessarily the bottom. I am saying it is fair to good value, even given the current business outlook.
SNOOPY
discl: hold HGH, but despite my recent purchase it is still in an underweight position in my portfolio. IOW, I plan on buying more!
Money creation 101, as some would have us believe.
https://www.youtube.com/watch?v=IzE038REw2k
With the greatest of respect, this sounds like a case of building a business to be too big around one customer. If the motor repair business wanted to expand maybe take on casual workers while the business builds up so that those workers can be shed if the expansion doesn't work. Negotiate a more flexible lease with your landlord. Hard to do before Covid-19 I know, but I think landlords should be more flexible now.
Two very large book shops going under in quick succession is bad luck, although book shops have been vulnerable for the last few years. You probably can't blame this on Covid-19.
How much of Heartland's loan portfolio is in the wholesale and retail sectors? From AR2019 p50
( $11.520m + $18.048m ) / $4201.334m = 0.7%
How much of Heartland's loan portfolio is in the property and business sevices sectors? From AR2019 p50
( $88.744m ) / $4201.334m = 2.1%
I think Covid-19 might mean it is harder to hide dishonesty. The default position for lenders would be a loan is in trouble until the owner of the loan can prove otherwise.
There is no way to sugar coat any of this. But consider this question. If you owned a finance company, where would you want to put your financing? The oldies have to be a good bet, via modestly geared reverse mortgages. That sounds a lot less risky than financing a new house bought on zero deposit. If you are financing a business, wouldn't you go after the tradies? Drains keep getting blocked, irrespective of the state of the economy. And with overseas travel out, for those that have a job, wouldn't customers like to instead treat thenselves to a new car? NZers likes a bargain and Holden is offering that! Finally, ask yourself how may farmers who buy and sell stock have an amoeboid backbone?
I think Heartland are pushing their financing into the right sectors. On the delivery mechanism, Heartland's push into digital seems to be the way to go for that younger target market. If Jeff died of a heart attack tonight and I was appointed to replace him I think I would leave the Heartland business strategy exactly the same. I am a little nervous about O4B in Australia, but that is about it. None of this will convince those who would not consider any investment in the finance sector. But despite the BBB credit rating, I am less nervous about my investment in Heartland than I am about any investment in those big Aussie banks.
SNOOPY
Reverse equity loans should be very sound as should livestock lending.
The rest of their lending has too many unknowns, for me to try and guess the level of defaults
However I doubt we will get any clarity until late next year.
CLARITY.[saves guessing]
Bit of excellent clarity here.Easy to see why it is my largest investment.From PAZ's 6th August announcement.
' Sales have increased by more than 85% in the past
two years, profit has more than tripled and we continue to expand at pace,”
“We are in the right sector at this time. Demand continues to be strong, and we are confident this will
continue through an economic downturn. Historically in times like this, people have tended to focus
on health and wellbeing – so our natural dietary supplements and ingredients and strong New Zealand
brand should hold us in good stead.”
I have humoured everyone by cutting straight to the 'answer'. But this is a situation of considerable uncertainty as to which (or any?) scenario of the ones I have produced is realistic. To understand just how realistic any of these scenarios might be, you have to know what information i put into the model to come up with the answers I did. If I tell you that, and you realise that the profit projections I gave were a result of merely 'turning the handle on the sausage making machine' without any further input from me, then that will allow better judgement as to whether any of the profit projections that I have made make any sense. The table below shows the revenue changes that I have assumed for FY2021 and FY2022 that have changed from the 'base case' (EOFY2019). I am saying nothing about FY2020. I am 'looking through' the current year result because it is likely to be distorted by the advent of Covid-19. So it won't be a good 'base year' to work from.
Three Revenue Forecast Scenarios Pessimistic View (Post 13411) Middle View (Post 13429) Optimistic View (Post 13438) Reverse Mortgage Adjustment Zero Growth => +6.7% compounding existing loans 2.5% Growth => 6.7% + 2.5% = 9.2% compounding of loans 8% Growth => 6.7% + 8% = 14.7% compounding of loans Motor Vehicle Finance Adjustment (New) 45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022) 45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022) 45% reduction in new three year contracts => 15% reduction in annual revenue (FY2021) reducing to a 7.5% reduction in annual revenue (FY2022) Motor Vehicle Finance Adjustment (Used) 10% reduction (FY2021) with a further 10% reduction (FY2022) 10% reduction (FY2021) with a further 10% reduction (FY2022) 10% reduction (FY2021) with revenue stabalising (FY2022) Business Finance (Part 1) O4B Adjustment 80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 15%[, not compounding (FY2021 & FY2022) 80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022) 80% of loans wiped out for two months (FY2021). Reduction in remaining loan balances of 10%[, not compounding (FY2021 & FY2022) Business Finance (Part 2) 'Intermediated' and 'Relationship' Adjustment Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)Relationship: 16% compounding loss over two years to EOFY2021, then stable
Intermediated: 10% loss from base level (not compounding)Relationship: One off 16% loss from base level to EOFY2021
Intermediated: 10% fall over FY2021, before recovering all of that fall in FY2022Rural Finance Adjustment (None) Zero Growth Zero Growth Zero Growth Harmoney and Other Consumer Lending Adjustment Collapse of Harmoney over a two year period Harmoney halved in size from FY2021 Harmoney halved in size from FY2021
None of the above information is new. It has all been disclosed in various previous posts of mine. But something is added by reproducing all of this information together in one place.
SNOOPY