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 A Cautious Tale of Opportunities and Risks

UNDERPERFORM
Heartland Group Holding's (HGH) 1H21 result was broadly in line with our expectations, with lower than anticipated impairment expenses offset by subdued receivable loan growth. This was predominantly due to the impact of the comprehensive COVID-19 fiscal stimulus packages provided by both the New Zealand Government and Reserve Bank of New Zealand during 1H21, driving early loan repayments and a slowdown in demand for financing. ​While we welcome HGH's longer term strategy of focussing on divisions exhibiting a higher return on equity, such as the motor and reverse mortgage books, we remain unconvinced by the company's investment into 'digital' and the long term potential of its Open4Business platform. We retain our UNDERPERFORM rating given HGH's sub-scale, high-risk profile compared to its international peers, an elevated cost to income ratio and slowing receivable growth expected to continue into 2H21.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY21 NPAT increased from NZ$77.2m to NZ$82.2m (+6.5%)
Target price:&nbsp;Increased from NZ$1.61 to NZ$1.72&nbsp;(+11c)&nbsp;



Rural division presents competitive opportunity


For a business to sustain a return on equity in excess of its cost of capital it needs&nbsp;to exploit and maintain a clear competitive advantage.&nbsp;HGH's&nbsp;scope for generating competitive advantage is limited given&nbsp;its lack of scale (1% of New&nbsp;Zealand&nbsp;banking assets) and inability to compete on cost of funding and resulting yield. As a result, we&nbsp;believe&nbsp;HGH's&nbsp;greatest opportunity lies in the rural sector given 1) its legacy network of relationship managers, 2) strong rural brand, and 3) reduced competition. However, in recent years HGH has reduced loan receivables in the division, while we await the impact of its new digital livestock platform.&nbsp;


Softer impairments&nbsp;offset by lower loan receivables


HGH's improved impairment expense ratio of 0.19% in 1H21 (0.40% at 1H20) was driven indirectly by supportive fiscal stimulus rather than an obvious improvement&nbsp;in the underlying quality of HGH’s loan book. This benefit was offset by lower receivable loans during the period, which due to early repayments and lower demand for financing saw total receivables grow just 1.3% from FY20.&nbsp;


Valuation


We make changes to our risk free rate (from 1.3% to 2.3%) and market risk premium (from 6.0% to 5.5%), consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021. Our WACC increases from 8.9% to 9.3%. We raise our forecast FY21 return on equity (ROE) from 9.2% to 10.5%, which more than offsets the increased cost of capital and lifts our target price from NZ$1.61 to NZ$1.83. On current prices, our 12 month forward ROE driven target price implies a lower P/BV multiple than HGH is currently trading on.&nbsp;



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





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



Heartland Group: A Cautious Tale of Opportunities and Risks