New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Heartland Group Holdings / Equity Bottom-Up

Heartland Group 3Q21 Update&nbsp;— Expensive at Current Levels

UNDERPERFORM
Heartland Group Holdings (HGH) has reported an unscheduled&nbsp;trading update for the nine months to 31 March 2021, citing supportive economic conditions and modest receivable loan growth in the Motor, Reverse Mortgage and Business&nbsp;Intermediated&nbsp;divisions. Guidance for FY21 was lifted&nbsp;by +2% at the mid point​​​​​​​​​​​​​​&nbsp;to NZ$85m–$86m (vs. our prior expectations of NZ$82.2m) from prior guidance of NZ$83m–$85m. HGH's cost to income ratio was reported at 44.1% (-3.2% on 1H21), its impairment ratio was 0.27% (+0.17% on 1H21) and receivable loan growth was up +3.4% on 1H21. Going forward, we remain unconvinced that HGH can generate a long term return on equity in excess of its cost of capital given&nbsp;its sub scale,&nbsp;higher risk profile, lower quality loan book and lack of competitive advantage, and​​​​​​​ are yet to see the benefits of its digital strategy materialise. Given a recent rally in the stock price, we retain our UNDERPERFORM rating.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21 NPAT increased from NZ$82.2m to NZ$86.3m (+5%),&nbsp;receivable loan growth increased in outer years
Target price:&nbsp;Increased from NZ$1.72 to NZ$1.79 (+4%) in line with earnings revisions



Modest 3Q21 receivables loan growth&nbsp;


Receivable growth of +3.4% in 3Q21 was driven by increases in its Motor, Business Intermediated and Reverse Mortgage books, highlighting favourable category exposures. Repayments in 3Q21 were lower than 2H21, having normalised post COVID-19 disruptions. We expect the motor division in particular to continue to perform strongly in 4Q21, given healthy domestic demand.&nbsp;


Residential mortgages — a change in approach?


HGH is looking to build upon its small residential mortgage book and compete with large International banking peers. At this stage we remain cautious regarding the opportunity for HGH given 1) the slim margins generated with a product yield starting from&nbsp;1.99%,&nbsp;2) the highly competitive nature of residential mortgages in the New Zealand market, and 3) the brand power behind competing Australian banks. However, if execution is successful, we note a greater return on equity can be generated given the lower capital requirements needed for a residential mortgage product vs its current product mix.&nbsp;The company currently has ~NZ$30m of residential loan receivables (0.6% of its total loan book).&nbsp;


Valuation&nbsp;


HGH and Australian banking peers have re-rated strongly with initial fears of a severe downside economic scenario now subsiding. With the stock trading on a P/BV of 1.15 and generating a ROE/COE of 1.04 for FY21, using a variant of the Gordon Growth Model we derive a target price of NZ$1.79, retaining an UNDERPERFORM rating.&nbsp;



Jamie Foulkes
jamie.foulkes@forsythbarr.co.nz
+64 4 914 2217





Ashton Olds, CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Heartland Group: 3Q21 Update — Expensive at Current Levels