Will NZ’s Financials Sector Be Able to Tackle Uncertain Macro Environment- 2 Stocks to Consider

Overview:

Heartland Group Holdings Limited (NZX:HGH) is the financial services group with operations in New Zealand and Australia. Kingfish Limited (NZX: KFL) is a listed investment company that invests in growing New Zealand companies.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

Sector Landscape and Outlook

As per the release by Reserve Bank of New Zealand dated 10^th April 2024, NZ economy has been evolving as anticipated by the Monetary Policy Committee. The current consumer price inflation is above the Committee’s 1% - 3% target range. A restrictive monetary policy stance is necessary to further reduce capacity pressures and inflation. MPC agreed to leave the Official Cash Rate (or OCR) at 5.50%. Globally, even though there are differences throughout regions, the economic growth is below trend as well as is expected to remain subdued. However, most of the major central banks are cautious regarding easing monetary policy considering the ongoing risk of persistent inflation.

While some of the near-term price pressures exist, the Committee remains confident about maintaining OCR at the restrictive level for the sustained period. There are expectations that consumer price inflation would return to within 1% to 3% target range this calendar year.

The economic growth in most of NZ’s major trading partners was below trend. However, this has varied throughout regions, as there was stronger activity in the US as compared to Euro Area and Australia. The economic growth in most of the major economies is expected to slow further over 2024. In China, there have been announcements about similar growth target for this calendar year. However, this could be difficult to achieve considering the ongoing structural challenges.  

Sector lending & deposits summary – Banks (February 2024)

As per RBNZ, the housing lending stock rose$730 Mn (or 0.2%), up on the $396 Mn increase witnessed in February last year. The annual growth rate witnessed an increase from 2.9% to 3.0%. The personal consumer lending stock increased $25 Mn (or 0.2%), down on the $75 Mn increase witnessed in February last year. The annual growth rate fell from 4.1% to 3.7%.

The business lending stock rose $840 Mn (or 0.6%), with bank lending stock increasing by $775 Mn (0.6%). The annual growth rate increased from 1.4% to 1.7%. The agriculture lending stock increased $133 Mn (or 0.2%), up on the $49 Mn rise witnessed in February last year. The annual growth rate rose from 0.8% to 1.0%.

Exhibit 1: Lending Pattern– Banks and NBLIs

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt.nz for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Credit Card Spending Patterns- February 2024

As per credit card summary release dated 21 March 2024 by RBNZ, the seasonally adjusted total billings in New Zealand amounted to $4.6 Bn in February 2024, reflecting a rise of 1.7% from January 2024, as well as up by 2.2% from February 2023. The seasonally adjusted domestic billings on New Zealand issued cards stood at $3.9 Bn in February 2024, up by 0.8% from January 2024, as well as down by 0.5% from February 2023. The billings in New Zealand on overseas issued cards fell by 3.3% from last month to $0.8 Bn. Annually, the billings on overseas issued cards increased 23.4%.

The total credit limits amounted to $21.0 Bn (not seasonally adjusted) in February 2024. This was similar to January 2024. It was the lowest value since February 2015.

Exhibit 2: Total Billings On New Zealand Cards (NZD Mn) (Actual vs Seasonally Adjusted)

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt.nz for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group

Loan to Value Ratio- New Commitments (February 2024)

The total monthly new mortgage commitments stood at $4.9 Bn in February 2024, reflecting a rise of 44.0% from $3.4 Bn in January 2024. The seasonally adjusted value rose 4.0% from January 2024. Annually, the value of new commitments increased by 28.1% from $3.8 Bn in February 2023. The value of new commitments to first home buyers witnessed a rise of 36.0% as compared to February 2023. Notably, the value of new commitments to other owner occupiers rose 23.7% over this period as well as the value to investors rose 35.9%.

The share of new mortgage commitments to first home buyers declined to 22.6% in February 2024, down from 24.1% in January 2024. However, this is a YoY increase from 21.3% in February 2023. The share of new commitments to investors fell to 17.3%, down from 17.8% in January 2024. In February 2023, the share to investors stood at 16.3%.

Key Risks and Challenges:

Over the past few months, the measures of business confidence have declined and firms’ own expectations for activity as well as investment have weakened. Notably, the near-term business pricing intentions declined but remain elevated, in part reflecting a rise in realised and expected costs. Notably, the Committee mentioned that government expenditure is indicated to fall as a share of the economy in upcoming years.

There are some upside risks to the inflation outlook. Notably, the persistence of services inflation is the risk as well as goods price inflation is elevated. Anticipated near-term rises to local government rates, insurance as well as utility costs could further slow fall in headline inflation.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

The aggregate commodity price indices remained relatively stable even though there have been ongoing geopolitical uncertainties. The oil prices have increased while agricultural commodity prices were weaker. The GDP for the December 2023 quarter remained close to expectations as well as implies continued easing in capacity pressure in the economy. Some higher frequency indicators reflect the modest recovery in activity in the Q1 FY 2024. The ongoing restrictive monetary policy settings are critical to reduce inflation, while avoiding unnecessary instability in output, employment, interest rates as well as the exchange rate.

There is still confidence that monetary policy has been restricting demand. Notably, a further drop in capacity pressure is anticipated, supporting ongoing decline in inflation. The Committee agreed that interest rates are required to remain at restrictive level for a sustained period to make sure that annual consumer price inflation returns to the 1%- 3% target range.

Apart from the sector-specific factors, an analysis on 2 NZX-listed companies is provided. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Heartland Group Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 902.54 million, Annual Dividend Yield (TTM)¹: 12.57%)

Business Description:

Heartland Group Holdings Limited (NZX: HGH) is the financial services group with operations in New Zealand and Australia.

Outlook:

HGH announced that it has received indicative regulatory approvals from Australian Prudential Regulation Authority (or APRA) as well as the Reserve Bank of New Zealand (or RBNZ) for Heartland Bank Limited’s acquisition of Challenger Bank Limited from Challenger Limited.

Heartland’s ambition is to achieve post underlying NPAT of $200 Mn as well as an underlying cost-to-income (or CTI) ratio of less than 35% by the financial year ending 30 June 2028 (FY 2028).

Valuation Methodology: Price/BV Per Share Based Relative Valuation (Illustrative)

Technical Overview:

HGH Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, HGH prices are sustaining above the falling trendline support zone. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~36.90 level. However, the prices are trading below the trend-following indicator 21-period SMA, which may act as a resistance level. An important support level for the stock is placed at NZD 0.96, while the key resistance level is placed at NZD 1.21

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.060 per share, down by 1.85% as on 18^th April 2024.

2) Kingfish Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 418.66 Mn, Annual Dividend Yield (TTM)¹: 9.46%)

Business Description:

Kingfish Limited (NZX: KFL) is a listed investment company that invests in growing New Zealand companies.

Outlook:

In the March quarter, Kingfish delivered the gross performance return of 5.5% as well as an adjusted NAV return of 4.8% as compared to the 2.8% return of the S&P/NZX50 gross index. The quarter’s performance reflects robust returns from several portfolio companies, led by China-focused infant formula maker a2 Milk as well as Vista (+21%).

The company is committed to providing shareholders with competitive investment returns from professionally managed hand-picked portfolio of NZ’s best companies.

Technical Overview:

KFL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, KFL’s stock prices are forming a trading range, characterized by higher lows and identical highs, suggesting that the sideways period in the stock might continue to persist in the near future. Moreover, the momentum oscillator RSI (14-period) is hovering near the midpoint, adding further evidence for the mentioned recommendation. Prices are fluctuating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is placed at NZD 1.07, while key resistance level is situated at NZD 1.45.

Stock Recommendation

Considering the facts above, a ‘Hold’ recommendation on the stock has been provided at the closing market price of NZD 1.23 per share, up by 0.82% as on 18^th April 2024

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is April 18, 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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