Company Overview: humm group limited (ASX: HUM) provides BNPL products, consumer revolving finance, cards and commercial leasing and SME financing services. The company’s products include humm, bundll, humm90 and hummpro. The company facilitates purchases of more than 2.7 million customers and operates in Australia, New Zealand, Ireland and the United Kingdom.

HUM Details

Favourble Outlook to Support Future Growth: HUM is one of the leading players in the BNPL business and operates a diversified operating model with a portfolio of successful growth and seasoned products. In the medium-term, the company is planning to double its FY21 volume at the back of rising customer numbers, average transaction values and frequency of transactions in the core growth portfolio. The company would be focused on increasing the reach of its instalment payment core by attracting new merchants and platforms in current markets.

Q1FY22 Operational and Financial Highlights: Despite the challenges due to lockdown during the quarter, the company’s growth was decent, evident by the growth of ~157% in humm ‘Little things’ volume in Australia.

• HUM’s witnessed overall volume growth of 39.6% to $763.3 million in Q1FY22, reflecting the advantages of its diversified portfolio offering products, which was able to finance smaller and larger items seamlessly for both consumers and SME’s.
• BNPL segment volumes stood at $308.8 million, reflecting a rise of 44.5% over pcp. As on 30 September 2021, the company’s total customers stood at 2.7 million, with an increase of 6.1% over Q1FY21, which include an increase of 16.0% in BNPL customers.
• Subsequent to the end of the quarter, the company announced the pricing of $390 million of asset-backed securities, underpinned by a pool of fully amortized, secured commercial auto and equipment finance receivables.

Volume Trend (Source: Analysis by Kalkine Group)

FY21 Financial Summary:

• Fall in Net Operating Income: During FY21, the company recorded a net operating income of $342.9 million as compared to $361 million in FY20; the fall was mainly led by a decline of 7% in gross income to $443.9 million. Despite the fall, the company witnessed growth in Australian commercial and numerous BNPL products.
• Cash NPAT and Volume Growth: During the year, the company witnessed a growth of ~121.1% and 31.3% in cash net profit after tax and ‘Buy Now Pay Later’ (BNPL) volume to $68.4 million and $1,034.9 million, respectively. The cash NPAT growth was generated by increased profitability of the Commercial and Leasing and Cards segments during the year.

Partnership with Air New Zealand: As announced on 18 November 2021, the company entered into a partnership to roll out a portfolio of financial services products with Airpoints (Air New Zealand’s loyalty programme).

• HUM would bring its deep expertise in market-leading digital experiences and financial product innovation, including with credit cards and BNPL.
• The said partnership is likely to roll out the first product in FY22.
• In addition, both parties expect to deliver significant upside in business moving forward.

Top 10 Shareholders: The top 10 shareholders together form around 42.33% of the total shareholding, while the top 4 constitute the maximum holding. Abercrombie (Andrew J) and Renaissance Smaller Companies Pty. Ltd. are holding a maximum stake in the company at 20.19% and 5.91%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, the company reported a gross margin of 77.5% as compared to 76.2% in FY20. In addition, the net margin for the year stood at 13.5% as compared to 4.5% in FY20. Return on equity for FY21 was 9.0% against 3.6% in FY20. On the balance sheet side, debt-to-equity ratio was improved to 3.19x as compared to 4.0x in FY20.

Margin and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Capital and Funding Risk: HUM operates in a highly competitive and rapidly changing sector, and thus, it requires a regular flow of funding to operate its business smoothly. Hence, any non-access to the capital and funding required to support growth may impact its business.
• Technology Risk: HUM is exposed to the risk arising from changing technology, which may change the way of doing business.

Outlook: Moving ahead, the company would focus on generating customer engagement and transaction frequency via building its products which are loved and used every day. It would also look to expand into new markets internationally via a considered and differentiated strategy that will appeal to a broader range of retailers and customers than traditional BNPL players. The company also anticipates its cost-to-income ratio to be below 40% in the medium term, on the back of strong uplift in gross income and managing its costs in a prudent way. HUM will be engaged in finding new audiences through partnerships for its innovative products.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of HUM has been corrected by ~28.91% in the past six months. The stock just recovered from its 52-week low level of $0.72, offering a decent opportunity for accumulation. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average EV/Sales multiple, considering the COVID-19 uncertainties and fall in operating income, etc. For the purpose of valuation, few peers like Zip Co Ltd (ASX: Z1P), Credit Corp Group Ltd (ASX: CCP) and WISR Ltd (ASX: WZR) have been considered. Considering the expected upside in valuation and current trading levels, growing volumes, plans for international expansion, optimistic long-term outlook, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.745, as on 13 December 2021, ~10.30 AM (GMT+10), Sydney, Eastern Australia.

HUM Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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