Aging Demographics And Digitalisation Will Support Long Term Reverse Mortgage Demand

Catalysts

About Heartland Group Holdings

Heartland Group Holdings is a trans Tasman specialist banking group focused on niche lending segments including Reverse Mortgages, livestock finance and targeted motor and asset finance.

What are the underlying business or industry changes driving this perspective?

• Accelerating demand from ageing populations in New Zealand and Australia for equity release products, supported by house price appreciation and rising retirement funding gaps, is identified as a key driver for Heartland's targeted Reverse Mortgage growth above 18%, with the aim of expanding receivables and interest income.
• Structural undersupply of suitable retirement and aged care accommodation, together with increasing use of retirement village models, supports products like the Village Access Loan. This may enable higher Reverse Mortgage penetration and larger average loan sizes, contributing to revenue and margin benefits from greater scale.
• The transition of the Australian business from wholesale to predominantly deposit funding, with deposits now at 81% of funding and moving higher, is expected to structurally lower the cost of funds, which in turn supports net interest margin expansion and earnings.
• Group wide digitalisation and process automation across origination, collections and servicing are expected to reduce manual processing and support stable operating expenses. This is intended to help improve the cost to income ratio and net margins as volumes grow.
• Active redeployment of capital from nonstrategic and unsecured lending into higher returning core portfolios such as Reverse Mortgages and livestock finance, combined with anticipated regulatory capital recalibration, is aimed at improving return on equity and supporting NPAT growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Heartland Group Holdings's revenue will grow by 17.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.5% today to 30.3% in 3 years time.
• Analysts expect earnings to reach NZ$123.6 million (and earnings per share of NZ$0.13) by about December 2028, up from NZ$38.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$141.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the NZ Banks industry at 27.2x.
• Analysts expect the number of shares outstanding to grow by 4.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Management is targeting at least NZD 85 million underlying net profit after tax in FY 2026 and a return on equity of at least 7% with further upside to 2030. If these earnings and return ambitions are achieved or exceeded on the back of margin expansion and capital optimisation, the share price could trend higher as earnings and valuation multiples re-rate, driving stronger net profit and earnings growth.
• The long-term strategy is built around high growth, high returning core products such as Reverse Mortgages and livestock finance, with management signalling potential portfolio growth above 18% per year and very large addressable markets in both New Zealand and Australia. If demand continues to accelerate and Heartland sustains or grows market share, revenue and interest income could increase materially faster than currently reflected in the share price, supporting higher earnings.
• Both banks have already delivered meaningful net interest margin expansion by shifting from wholesale to predominantly deposit funding and by reducing the cost of funds, and management guides to further NIM gains in FY 2026 and beyond. If funding costs continue to fall while pricing discipline holds, net margins and operating leverage could improve more than expected, lifting profitability and earnings.
• Asset quality metrics in key portfolios such as Motor, Rural and Livestock are improving after a deliberate derisking and policy reset, and arrears are now trending better than industry average in some segments. If credit losses normalise from the elevated FY 2025 impairment expense and remain low through the cycle, the reversal of this headwind could significantly boost net profit and earnings.
• Group wide digitalisation, process automation and cost discipline are expected to stabilise or slow growth in operating expenses while receivables in core portfolios resume expansion. If technology investments successfully reduce manual processing and allow income growth to outpace costs, the cost to income ratio could fall meaningfully, supporting higher operating margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$1.03 for Heartland Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$1.15, and the most bearish reporting a price target of just NZ$0.85.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NZ$408.0 million, earnings will come to NZ$123.6 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of NZ$1.12, the analyst price target of NZ$1.03 is 8.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.