Heartland Group Holdings Limited

Company Overview: Financial services group, Heartland Group Holdings Limited (NZX: HGH) operates through its subsidiary Heartland Bank Limited focusing on banking products in three markets such as Household, Business and Rural, within New Zealand and Australia. A Household includes investment products, consumer lending, reverse mortgages and motor vehicle lending. The Business includes working capital and fixed capital finance. It provides finance for small-to-medium-sized businesses available online including through its digital platform. Rural includes rural loans and livestock finance distributed through its relationship managers and alliance partners. The Company provides reverse mortgage loans and also provides funding to partners in the Small Business and Consumer Lending sectors.

HGH Details

Enhancing Economic Values through Digital Initiatives: Heartland Group Holdings Limited (NZX: HGH) is a financial services group with operations in Australia and New Zealand. In New Zealand, Heartland Bank Limited is a registered bank that concentrates on ‘best or only’ banking products in three key markets: Household, Business, and Rural. In Australia, Heartland is a professional provider of reverse mortgage loans and offers funding to associates in the Consumer Lending and Small Business sectors. The company has a market capitalization of ~$787.619 million as on November 16, 2020.

Results Performance (Year Ended 30^th June 2020)

Net Interest Income for the full-year period stood at $216.67 million, as compared to $194.31 million in the previous year. Total net operating income increased by 13.2% to $233.2 million. The second half of the FY20 witnessed a surge in net interest income by $6.3 million (5.7% increase half-on-half), which can be attributed to a $4.6 million decrease in interest expense, primarily due to 28 bps reduction in the cost of funds, and a $1.7 million increase in interest income largely driven by $117.5 million improvement in interest-earning assets.

Operating expenses for the period stood at $106.8 million, an increase of 24.5% on FY19. This increase can be attributed to a $7.3 million (15.1%) increase in staff expenses, and a $3.3 million (97.6%) increase in marketing investment across both New Zealand and Australian markets to drive product and brand awareness. Profit for the year stood at $71.97 million, a decrease of 2.2% on the previous year. EPS stood at 12.5 cps, a decline of 0.5 cps from FY19. Adjusted EPS was 13.7 cps, an increase of 0.7 cps from FY19.

Due to growth in reverse mortgages, business intermediated, Motor, Open for Business (O4B) and Harmoney, offset by a decrease in non-core lending, receivables increased by 4.9% to $215.0 million. Total assets surged by 7.9% to $389.1 million, primarily driven by 5.4% increase in net finance receivables. Total funding increased by 7.6% to $320.9 million.

Exhibit 1:  Income Statement

Source: Company Reports

Segments Business Performance:

New Zealand Reverse Mortgage: Net operating income for the segment was $23.5 million, an increase of 12.7% over FY19. Receivable for the period increased by 9.7% to $559.9 million mainly driven by marketing and digital channels enhancement costs.

Motor: Net operating income for the segment was reported at $60.6 million, an increase of 6.2% on the prior year. Receivable for the period increased by 3.4% mainly due to an increase in the motor dealer book.

Harmoney and other Personal Lending: Net operating income for the segment came in at $17.2 million, an increase of 39.1% on the previous year. Receivables increased $10.1 million as a result of New Zealand portfolio contracting by 3.7% to $145.9 million while the Australia portfolio increasing by 40.9% to $54.0 million. Both the portfolios were impacted by the outbreak of the COVID-19.

Business Intermediated: Net operating income for the segment was registered at $21.9 million, an increase of 24.3% on the previous year. Receivable increased by 17.3% to $499.0 million.

Business Relationship: Net operating income for the period was recorded at $24.8 million, a decrease of 13.4% on the last year. Receivable for the period was posted at $63.9 million, a decrease of 11.4% on the last year.

O4B: Net operating income for the segment was at $14.7 million, an increase of 53.7% on the previous year. Receivable for the period increased by 16.4% to $155.1 million.

Rural: Net operating income in FY20 was reported at $30.7 million, a decrease of 3.1% on FY19. Receivable for the period decreased by 7.7% to $605.7 million.

Australia: Net operating income was recorded at $34.3 million, an increase of 51% whereas receivable increased by 18.4% to $957.5 million.

Exhibit 2: Key Data

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 24.42% of the total shareholding. Harrogate Trustee Ltd. and Oceania & Eastern Ltd. are holding a maximum stake in the company at 10.01% and 2.27%, respectively, as provided in the table below:

Exhibit 3: Top 10 Shareholders

Source: Refinitiv (Thomson Reuters)

A Quick Look at Key Metrics: The company’s net interest margin for FY20 stood at 4.33%, better than the industry median of 2.16%. Its efficiency ratio for FY20 stood at 46.3%, lower than the industry median of 54.8%, implying that the bank is more efficient in terms of managing its overheads in respect to revenue than the peers.

Exhibit 4:  Key Metrics

Source: Refinitiv (Thomson Reuters)

Exhibit 5: Key Valuation Metrics

Source: Refinitiv (Thomson Reuters)

Recent Update:

• HGH’s subsidiary Heartland Bank Limited (Heartland) (NZX: HBL) has lowered its already low floating home loan rate to 2.50% p.a., which is the lowest floating rate offered by a bank in New Zealand.

Decent Dividend History:

On 17th September 2020, the Board of Heartland Group decided to pay fully imputed 2020 final dividend amounting to 2.5 cents per share on 9th October 2020 to all shareholders registered as on 25th September 2020. This resulted in the total dividend of 7.0 cps.

Exhibit 6: Dividend History

Source: Company Reports

Outlook:

The outlook of the group is stable, underpinned by the recent update where Fitch Ratings has affirmed the Long-Term Issuer Default Ratings of Heartland Group Holdings Limited and Heartland Bank Limited at 'BBB'. The company’s board is committed to achieve strong growth and profitability while maintaining positive outcomes for customers. The management is confident about achieving strong growth and profitability despite the challenging business environment created by the COVID-19. Heartland expects its NPAT for the year ending June 30, 2021, to be in the range of $83 million-$85 million.

Exhibit 7: FY 2021 Outlook

Source: Company Reports

Valuation Methodology: P/BV Based Relative Valuation (Illustrative)

P/BV Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has been trading in the range provided by the upper Bollinger band of $1.43 on the upside and 20 periods SMA of $1.28 on the downside. It has given ‘Doji’ close on the first trading session of the ongoing week at $1.35 which indicates indecisiveness on the part of traders/investors. The technical indicator RSI with 53 reading suggests bullish momentum for the stock.

Going forward, the stock may continue to trade in the range with an upside bias. It may have resistance around $1.43 whereas support could be around $1.28.

Stock Recommendation:

HGH is among the only two Australasian banks to have no adverse change to its rating as the global economy entered the economic downturn. Its strategy to drive its future earnings involves acquiring scale in banking in New Zealand; expansion in Australia; and going digital to across board.

Considering the aforesaid facts, resilient FY20 results, key strategic objectives, and positive outlook we have valued the stock using Price to Book Value multiple based relative valuation (on an illustrative basis) and have arrived at a target price of a low double-digit growth (in % terms).

Hence, we give “Buy” recommendation on the stock at the current market price of NZ$1.350 per share on 16^th November 2020.

HGH Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.