Heartland profit forecast downgraded, but future positive

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Analyst downgrades forecast for Heatland's profit, but says if the company gets a banking licence it could make some "serious money". 

Thursday, September 20th 2012, 7:33AM

by Jenny Ruth

The value of Heartland New Zealand's non-core property portfolio is likely to decline further, despite the $30 million in losses already chalked up,says Forsyth Barr analyst Chris Cairns.

The portfolio was valued at $94 million at June 30 this year and Heartland said when it announced its results last month it had fully utilised the $30 million buffer provided by its arrangement with Pyne Gould and would have to take any further losses itself.

Cairns says he was surprised at the degree of impairment shown in the six months ended June. "I may well be being too conservative but they would be the first to admit the realisation of that non-core portfolio has been slower than they would have wanted."

Cairns notes that when Pyne Gould entered into its underwriting agreement, it had expected to profit from it which clearly hasn't happened.

The expected further losses are the reason Cairns has downgraded his profit forecast for the year ending June 2013 from $25.8 million to $22.9 million and has upped his estimate of charges against profit for bad debts from $9.3 million to $12.1 million. His forecast compares with the $23.6 million net profit Heartland reported for the year ended June this year.

However, Cairns retains a positive outlook for the company, noting the underlying trend in asset quality is improving and Heartland's cost of funds is falling.

Heartland is expecting the Reserve Bank to make a decision on the licence some time in November. Cairns says Heartland can expect a further 50 basis point fall in its cost of funds if it gets the licence.

"Once they get a bit more momentum and as markets improve, these guys could make some serious money," Cairns says.

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