Market News 15 April 2024

Johnny Lee writes:

Heartland Bank has received indicative approval from the regulators for its acquisition of Challenger Bank in Australia.

One of the key rationales for this purchase was the decrease in Heartland’s cost of funding in Australia. Heartland pays around 6.75% for its funding in Australia at the moment, while Challenger’s recent retail deposits have averaged nearer 5%.

The purchase of Challenger is conditional upon Heartland raising capital, which has led to the company to write to shareholders offering new shares via an accelerated non renounceable entitlement offer, or ANREO.

The rights are being issued at a ratio of 1 new share offered for every 6.85 held, meaning a shareholder of 10,000 shares will be given an allocation of 1,459. With an offer price of $1 per new share, the settlement amount is the same. There is no brokerage or fees involved in the shareholder offer.

The accelerated aspect relates to the relatively short timeframe facing shareholders. Shareholders have until 22 April (next Monday) to bid.

The non-renounceability means that shareholders cannot sell their entitlement. There will also be no shortfall bookbuild. The combination of these two things means that those who do not apply for their rights accept a total forfeiture of the value of the rights and accept the dilution that accompanies it.

The value of the rights - today - is approximately 10 cents, providing an incentive for shareholders to act. As with most rights issues, there is no reason to act early - investors can wait until nearer the 22nd to ensure the price does not fall below $1.

Those without the short-term liquidity to act on this offer do have the option to sell shares on market equal to the number of their entitlement - at market rates - before buying them back at $1 through the offer and pocketing any difference. Last week, this difference was worth about 10 cents per entitlement.

On the other side of the ledger, shareholders also have the option of bidding for an allocation beyond the 1 for 6.85 ratio through the Additional Shares offer. This offer is limited to 100% of the original offer and is not guaranteed, as it is effectively bidding for those new shares that other shareholders do not accept.

With a 10 cent incentive, Additional Shares may be limited. The Institutional acceptance rate was very high and was priced at the same level.

As the offer is fully underwritten by Jarden, the Challenger transaction will conclude regardless of shareholder participation. Those who do not participate will see their shares given first to existing shareholders who bid for Additional Shares, and then to the underwriter if there remains an excess of unwanted rights.

Shareholders who elect to participate in the offer can do so online via the website link sent from the share registry on 11 April. The same email contains the Entitlement Number, which is needed to apply. Payment is by direct debit and occurs the day after application. 

An important note in the announcement was that of a change in the company’s dividend policy, as well as a blueprint of the growth opportunities Heartland sees in Australia.

Heartland has indicated that next year's dividend will be equal to only 50% of underlying net profit after tax. The company’s forecast is for this profit to be near $110 million. Coupled with the new shares being created via this rights issue, short-term dividends are likely to decline.

Furthermore, the company mentions that it will be targetting inorganic growth - expanding through acquisition - and will plan its long-term capital needs (and therefore dividends) around these ambitions.

However, the company also included a forward projection - an ambition rather than formal guidance - for the next few years. The company is hoping to see profit rise to $200 million by its 2028 result, with this growth being driven by three key factors.

Firstly, is the anticipated increase in demand for Reverse Mortgages. The population of both countries is getting older, and demand for these services is higher among the older generation. An aging population presents many challenges, particularly around taxation and workforce participation, but does create opportunities for some like Heartland.

The second factor is the forecast growth in protein demand internationally, leading to growth in livestock production and demand for livestock lending services. This has been a very long-term trend - increased wealth has led to increased meat consumption - and Heartland believes financing will be a key part of Australia’s journey into feeding this market.

The last factor is an opportunity in the second-hand car lending market. Demand for new vehicles in Australia, including electric cars, is forecast to increase for several more years. Demand for second-hand cars is expected to follow this, and Heartland hopes it can capitalise on this demand with regards to financing.

The change in dividend policy is specific to 2024 and may mean a decline in income this year for its thousands of shareholders. This may be short-lived, as the company is hoping the Challenger acquisition will lead to significant growth in profit over the medium term. However, the company is also highlighting that these ambitions may require further capital.

Those who receive financial advice from Chris Lee and Partners have been sent an email with our view regarding this offer.

_ _ _ _ _ _ _ _ _ _ _ _

ALSO included in the announcement was confirmation that long-time CEO Jeff Greenslade will leave at the end of the year. The final eight months should provide ample time to arrange an orderly handover to a new CEO.

Greenslade has led what is now called Heartland for near 15 years. Such tenures are almost unheard of in the modern era - indeed Mr Greenslade is one of the country’s longest serving listed company CEOs.

The 2011 result saw the company proudly trumpet that it had achieved guidance with its $7.1 million profit and was planning to create a dividend policy to return some of these millions to shareholders.

Now the company is reporting $100 million profits and is raising further hundreds of millions to tackle new opportunities in Australia with the full support of major institutional investors.

At the same time, thousands of New Zealanders continue to benefit following the introduction of new financial products and services, including its Reverse Mortgage product. The banking landscape has undoubtedly been enhanced by the willingness of Heartland to disrupt, and the drive of those leading it.

The new CEO will be inheriting an exciting period of growth for Heartland, which is a testament to the vision, hard work and commitment of both Greenslade and the entire team at Heartland.

_ _ _ _ _ _ _ _ _ _ _

Travel

Our advisors will be in the following locations on the dates below:

18 April – Tauranga – Johnny Lee

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee

1 May – Timaru – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a new gold mine in Bendigo, Central Otago, including the history of gold mining in the area and plans for the future.

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 04 2961023.

Chris Lee & Partners Limited