humm®group announces half year 2024 results

·        hummgroup total receivables of $4.65b, up 23% on pcp

·        Commercial receivables of $2.70b, up 39% on pcp

·        Consumer Finance receivables of $1.95b, up 6% on pcp

• 1H24 Normalised Cash Profit (after tax)1 “Normalised Cash Profit”of $28.1m, was only down 27% on pcp, despite material increase in interest rates, and the rebuilding our PosPP offering. This profit was underpinned by another strong performance from Commercial

• Normalised Cash Profit was impacted by an interest expense increase of $61.7m from increases in receivables, base rates (offset by hedge benefits), credit spreads and improved efficiency in our funding structures

• 1H24 Statutory Net Loss (after tax) of $6.0m (1H23 Statutory Net Profit (after tax) of $7.5m)

• Group Net Credit Loss/Average Net Receivables (“ANR”) was 1.68%, a 27bps improvement on pcp

• Management executed $7.5m in further cost savings during 1H24 bringing the total savings to $26.1m since commencement of the program in 1H23, which offset some of the necessary reinvestment into customer facing roles and the overall inflationary environment

• Strong balance sheet with $4.65b in receivables, $159.4m in unrestricted cash, and $1.14b of warehouse headroom

• Fully franked interim dividend proposed of 0.75 cent per share

• A total of 20.9m shares (approximately 4.0% of shares on issue) purchased through buy back and share plan as at the date of this report

The drop in the SP has been a huge over-reaction as the results are a mixture of quite good and not so good.

Commercial is going very well and it just keeps growing with it being up 39% on PCP.

Consumer finance was OK with an increase of 6% on PCP.

Despite tough economic conditions the credit loss results were good and better than last year which is a credit to the company.

The problem is the increase in funding costs with the performance for the period being materially impacted by a $61.7m increase in interest expense, an 88% increase over the prior corresponding period, the result of increases to base interest rates, widening of credit spreads, increased leverage from additional mezzanine funding and higher receivables balances. While interest rates have increased over the last few years the increase in the last 6 months has been minimal so it is a bit much, as you would assume that the management of the funding is an important part of running a finance company.

Jump in unrestricted cash to $159m is excellent and with a current company value of around $282Million this values the company at around $123million and so this could be in play for a takeover.

Overall the results were a pass but management needs to get consumer credit and funding costs in order to improve the share price.

Humm's share price has moved from the middle 40's to today's high of $0.69 which is mainly due to the buy back which has been going for a few months now and has cleaned out some of the shorters/traders that have kept the price low. With some good results in the half yearly results in late February this stock could go over $1.00 quite easily as there is still significant value here.

AA the Managing Director of Humm continues to buy shares on the market and currently has approx 125 million shares which I believe shows confidence with the company and with current price around $0.42 they are quite inexpensive.and are due for a re-rate

Chairman and founder Andrew Abercrombie continues to accummulate shares on market, including over $260k declared today. Previous purchases have not caught the attention of the market.

I guess mostly reprising my short straw from a couple of weeks ago and following on from @NewbieHK and @thunderhead.  Management have, I agree, done a really solid job - just look at the turnaround in the Commercial business.  Rebecca James appears to have a gift with the branding, marketing, communications side of the business. She's compelling every time I see her speak.

The issue in BNPL though is growth and scale and maybe its my small brain and lack of visionary spirit but I just cant see a strategic pathway from where they are to scale growth in UK/Europe and North America given the competitive set they are on the field with - Apple, PayPal, Square/APT... CBA...

There has to be I think serious consolidation in the sector... perhaps the chairman sees a few offers coming his way?

I'm less worried about the debt which they seem to have a grip on than the stretch into BNPL and how that's going.  Humm seem to be another caught in the middle - a little late to the BNPL party, weighed down by legacy structure and systems internally and not able to get the growth that the BNPL hype demands.  At the same time, their commercial lending business seems to be going well.

I just can't see a path to them carving out a competitive niche when the likes of Square/APT, CBA, PayPal, Apple etc are coming after them.  They've built some good products no doubt but surely they are an acquisition in waiting?  Can't imagine they won't have to raise capital if they properly start to execute on their UK & Canada strategy.

Disc: small holding in my SMSF (waiting for an acquisition premium)

@Curly,

Yes, HUM does have a high Debt/Equity ratio (297%) which needs to be considered in the company risks. At the time of writing I was relying on Simply Wall Street data. I have since checked this against the Company Financials (page 12, extract attached) Both match up. On the positive side the debt/equity is improving!

Disc: hold shares RL

Full ASX Announcement

Some very pleasing results in the 4Q21 business update this morning:

•  hummgroup 4Q21 transaction volume of $774.9m, up 57.3% on pcp
• Record quarterly BNPL segment transaction volume of $304.9m in 4Q21, up 68.7% on pcp
• Cards (Australia and New Zealand) 4Q21 transaction volume of $287.5m, up 44.3% on pcp with spend continuing to return across key categories
• Commercial and Leasing transaction volume in 4Q21 of $182.4m, up 62.2% on pcp
• Total hummgroup customers of 2.7m as at 30 June 2021, up 19.7% on pcp
• Continuing improvement in net loss (gross write-offs net of recoveries) of $30.2m in 4Q21, down 20.3% on pcp
• 1,362 new merchants integrated across Australia and New Zealand in 4Q21 including strong growth in key verticals of health, luxury retail, home improvement, and automotive
• Based on unaudited accounts, Cash Net Profit After Tax of $68.4m, up 121.1% on pcp1

Disc: hold shares IRL

@Gummidge, I hold shares in HUM for the reasons you pointed out and HUM is good value if the pivot to BNPL goes to plan. HUM is targeting niche clients with larger transactions including Dental & Health. BNPL is a highly competitive sector and HUM comes with some significant risks and weaknesses. @Bear pointed out 10 years of poor performance by Flexigroup. ROE has shrunk from 22% in 2012 to 5% last year. 

Stengths:

• Forecast Growth 24.8% (see chart)
• PE 15.9
• PEG 0.6 (cheap)

Key Risks:

• Debt $2.21 billion
• Equity $744 million
• Debt/Equity 297% (debt is not well covered by operating cash flow)

Weaknesses:

• Future ROE = 8.9% (Low for a growth company, would  prefer 20%,  and this is also proped up by borrowed funds)

Valuation:

HUM shareholders could be well rewarded if the BNPL growth continues, if interest rates stay low and if the debt can be serviced over the next 3 years. There's a lot of 'ifs' there and valuation carries the same level of risk!

• Forecast E (2023) = $82 million*
• Outstanding shares = 394 million
• E/S 2023 = 82/394 = 20c/share
• PE 15
• Value (2023) = PE x E (2023) = 15 x 20c = $3.00

*Simply Wall Street data (consensus 3 analysts)

DIsc: Hold shares

Track Record of Management, when they were called FlexiGroup: