Thursday, August 4, 2011

Heartland Bank NZ Ltd: A Good time to Buy?

Investors are finding it hard to value the relatively new listing Heartland Bank NZ Ltd [HNZ.NZX]. It was listed on Jan 25 this year on the main board of NZX after a merger of CBS Canterbury, Southern Cross and the financial services business of PGC (MARAC), and has had some mergers and restructures since then when PPG Wrightson Finance was subsumed into HNZ and $55 million of capital was raised.

HNZ shares were trading at 88c on Feb 1 of this year and are currently trading at 61c as at close of business yesterday. Either the market has no faith in the value that management put on it or the company is undervalued.

The fact that the merged company has been trading in its present form since the beginning of the year means it doesn't have a long track record to prove its value to the market but with net tangible assets at 90c per share, there could be some money made here if those assets are quality ones and have been valued in terms of the current discount of assets in a global market with little appetite for risk.

The only downside that I see -and it is a big one - is its large debt burden of 1.9 billion and assets in the form of 1.75 billion in receivables and $285 million in cash or equivalents. (see Jan 2011 accounts) In the current climate where debt levels such as these have sunk other companies, this is probably the reason why investors have been a little cagey and the market has discounted the company and its shares.

HNZ's intention to become a fully fledged trading bank in due course means that investors that come in on the ground floor could be in for good long-term gains as the company grows and they are able to negotiate their way through a dire global financial situation and maintain their receivables accounts satisfactorily if things get worse and are able to tap future borrowing at good prices.

There is room for a private company such as this one. Its main competitors are TSB Bank and Kiwibank at this stage and the failure of Kiwibank to gain a strong foothold in business and its low value clients in personal banking leading to net losses over its 10 year lifespan will be incentive for Heartland to push on with capturing unsatisfied customers from that bank and the main ones as it grows.

Heartland has forecast an inaugural profit of between 6-8 million to be announced August 19 and investors will want to see that sustained and grown over the 2012 full year before Mum and Dad start climbing on board for a piece of the future action.

It might just be good value at 61c.

Heartland Bank @ Share Investor

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c Share Investor 2011