A broker's view: Heartland New Zealand
Sector: Financial services
Stock code: HNZ
Overview: Heartland arose from a three-way merger between CBS Canterbury, Southern Cross Building Society and MARAC Finance. The company subsequently purchased PGC Wrightson Finance. Heartland targets small to medium-sized businesses and the rural sector. On Monday Heartland announced the Reserve Bank had registered it as a bank, making it the only New Zealand operated, controlled and managed bank on the NZX.
Pros: Being a registered bank should be of great benefit to Heartland's earnings. It will improve its standing with depositors and borrowers and help it increase its interest margin. Its most recent result was promising, with underlying earnings of $20.2m. Particularly important in that result was the improvement in earnings in the second half. That improvement can, in part, be attributed to an improved interest margin. Further improvement in interest margins thanks to the banking license should increase earnings. The company trades at a discount of to its net asset backing of 90 cents per share. (Net asset backing is calculated by subtracting total debt from total assets and dividing by the number of shares.)
Cons: The discount to net asset backing could result from some legacy issues with the quality of the lending book, particularly in the non-core property book. This could lead to loan write-downs if the funds cannot be recovered. The credit rating of BBB- is at the lower end of investment grade ratings.
Price performance: After opening at 95 cents a share on February 1 2011, Heartland reached lows of 43 cents earlier this year before recovering to recently trade at 70 cents.
Investment outlook: The market still requires more evidence of consistent earnings from the company. If they can continue to produce good results their share price will increase. Suits investors with a high propensity for risk.
*A Broker's View is written by NZX broker and investment adviser Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Should you wish to receive personalised advice please contact an authorised financial adviser.
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