Summing of Scenarios: FY2021 and FY2022 (Iteration B)
Quote:
Originally Posted by
Snoopy
No one knows exactly how this Covid-19 tail may whip around and strike down HGH profits in the future. But I would argue you don't have to know this to build an investment case. I would argue the solution to investing in these circumstances is to do a 'Scenario Analysis'. That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: Scenario 1b, Scenario 2b and Scenario 3. I assess that the likelihood of each of these scenarios occurring in order is 30%, 50% and 20% (observant readers will notice these three relative probabilities add up to 100%).
So what happens when I combine my forecast from each scenario in those proportions?
FY2021 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
8.6c |
30% |
2.58c |
Scenario 2b |
10.4c |
50% |
5.20c |
Scenario 3 |
14.8c |
20% |
2.96c |
Total |
|
100% |
10.7c |
FY2022 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
7.7c |
30% |
2.31c |
Scenario 2b |
11.3c |
50% |
5.65c |
Scenario 3 |
20.1c |
20% |
4.02c |
Total |
|
100% |
12.0c |
Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.
FY2021: $1.07 to $1.28
FY2022: $1.20 to $1.44
With the share trading at $1.33 today, I would argue the share price has got ahead of itself and is now in the mid price range of FY2022 earnings projections. There are too many uncertainties about to justify buying in at this price now. I would like to increase my own stake in HGH further. But I am going to wait for a pull back in the share price before I do so.
discl: hold HGH with an average holding price of $1.40 (excluding dividends). Of course most of that holding was accumulated pre Covid with different earnings expectations!
Time to update my 'Scenario Analysis' to the revised Scenarios that I have worked through . That means look at different possible outcomes and then do a probability assessment of how likely each of the possible scenarios will unfold. Such a system is by no means perfect. But it is one better than sitting in your investment armchair utterly bamboozled that you cannot see a clear path ahead. You don't need a clear path to make rational investment decisions if you use 'Scenario Analysis'. For those who have been following this thread over the last few days, you will see that I have compiled three forecast scenarios: 'Pessimistic', '"middle of the Road' and 'Optimistic'. I assess that the likelihood of each of these scenarios occurring in order is 20%, 50% and 30% (observant readers will notice these three relative probabilities add up to 100%).
I have tweaked these probabilities a little from 'Iteration 1'.
So what happens when I combine my forecast from each scenario in those proportions?
FY2021 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
10.5c |
20% |
2.10c |
Scenario 2b |
14.3c |
50% |
7.20c |
Scenario 3 |
16.5c |
30% |
4.95c |
Total |
|
100% |
14.3c |
FY2022 |
eps |
Probability |
Factored Earnings Contribution |
Scenario 1b |
10.5c |
20% |
2.10c |
Scenario 2b |
17.5c |
50% |
8.75c |
Scenario 3 |
23.6c |
30% |
7,08c |
Total |
|
100% |
17.9c |
Now I believe that a suitable PE ratio for a second tier finance company should be between 10 and 12 in the current business environment. So this would imply the following share price ranges based on the above probability combined projected earnings.
FY2021: $1.43 to $1.72
FY2022: $1.79 to $2.15
With the share trading at $1.34 today, I would argue the share price is trading at an 8 to 23% discount to fair value on FY2021 earnings. This would suggest we are in a 'top up window' time, despite the recent strong share price rally since the dividend was paid.
SNOOPY
discl: hold HGH with an average holding price of $1.31 (excluding dividends). Haven't done as well as some here with HGH, but nevertheless managed to top up during the Covid wobbles to bring me back into the black.
Dividend Capitalised Valuation: The Data: FY2020.5 perspective
Quote:
Originally Posted by
Snoopy
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
FY2013 |
1.5cps(sp) + 2.0cps |
17th December 2012: Heartland becomes a bank |
FY2014 |
2.5cps + 2.5cps |
1st April 2014: Seniors 'Reverse Mortgage' Business Acquired |
|
|
FY2015 |
3.5cps + 3.0cps |
10th September 2014: invests in Harmony P2P startup |
|
|
28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) |
FY2016 |
4.5cps + 3.5cps |
FY2017 |
5.0cps + 3.5cps |
FY2018 |
5.5cps + 3.5cps |
FY2019 |
5.5cps + 3.5cps |
1st November 2018: Heartland Group Holdings restructure set up |
FY2020 |
6.5cps + 4.5cps |
|
Average FY2016 to FY2020 inclusive |
9.00cps |
|
I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.
Updating my dividend record for the about to be received final dividend payment from FY2020 earnings, paid in FY2021.
Year |
Dividends Paid 'per share' |
Significant Event During Year' |
FY2013 |
1.5cps(sp) + 2.0cps |
17th December 2012: Heartland becomes a bank |
FY2014 |
2.5cps + 2.5cps |
1st April 2014: Seniors 'Reverse Mortgage' Business Acquired |
|
|
FY2015 |
3.5cps + 3.0cps |
10th September 2014: invests in Harmony P2P startup |
|
|
28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings) |
FY2016 |
4.5cps + 3.5cps |
FY2017 |
5.0cps + 3.5cps |
FY2018 |
5.5cps + 3.5cps |
FY2019 |
5.5cps + 3.5cps |
1st November 2018: Heartland Group Holdings restructure set up |
FY2020 |
6.5cps + 4.5cps |
2nd April: RBNZ Covid-19 Package suspends NZ bank dividends to shareholders |
FY2021 |
2.5cps + ?.?cps |
|
Average FY2016.5 to FY2020.5 inclusive |
8.70cps |
|
I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards. It also reflects the fact that after several years of growth, FY2015 is no longer a 'business cycle representative' dividend payment year.
SNOOPY
Dividend Capitalised Valuation: The Calculation: FY2020.5 perspective
Quote:
Originally Posted by
Snoopy
Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation.
(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )
9.0c / (0.72 x 0.075) = $1.67
A reminder here that NTA was
($687.600m - $72.159m) / 577.468m = $1.07 cps
at the half year FY2020 balance date. This means my 'fair valuation' is at a good premium (+56%) to net tangible asset value.
This $1.67 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target share price range for HGH of $1.34 to $2.00. $1.90, where the share is trading today, looks a ten cents or so above fair value. My target accumulation price (10% below fair value) is now $1.50. And yes I could add the upcoming 4.5c interim dividend onto that fair value.
When valuing a share, it usually pays to check out value from more than one perspective. This valuation considers what HGH might be worth from purely a dividend paying perspective.
Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation.
(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )
8.7c / (0.72 x 0.075) = $1.61
A reminder here that NTA was
($699.980m - $72.813m) / 580.979m = $1.08 cps
at the full year FY2020 balance date. This means my 'fair valuation' is at a good premium (+49%) to net tangible asset value.
This $1.61 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target share price range for HGH of $1.29 to $1.93. $1.34, where the share is trading today, looks 27 cents or so below fair value. My target accumulation price (10% below fair value) is now $1.45. I should note here that if the permissions to pay bank dividends dividends are not fully restored by the RBNZ by the time the traditional dividend in March 2021 is paid, then the calculations in this post will have overvalued the HGH share.
SNOOPY