Company Overview: Humm Group Limited (ASX: HUM) is a payments services company with offerings in buy now pay later, revolving credit and SME financing services. The Group operates under four segments -  BNPL (a combination of humm, Oxipay New Zealand, Ireland FelxiFi business and FlexiRent Ireland); New Zealand Cards (Farmers, Q Card, Flight Centre Mastercard and Farmers Mastercard); Australia Cards (SKYE, LOMBARD, ONCE and bundll); Commercial & Leasing (Australia and New Zealand leasing).

HUM Details

Increase in Interest Income and Product Launches to Aid Growth: Humm Group Limited (ASX: HUM) is a financial services company. The market capitalisation of the company as on 18 January 2021, stood at ~$549.74 million. The company was previously known as FlexiGroup Limited, and it has rebranded itself to humm with ASX ticker ‘HUM’ as on 30 November 2020. This was on account of the simplification of the business and the company trimming down its products to four from twenty-three. The company will look to further consolidate its position in the buy now pay later space and leverage the humm brand’s interest-free product positioning to pursue growth opportunities in the future.

The company believes that there is a strong growth potential for its interest-free products in its established markets and HUM has further broadened its offerings to its customers with the launch of bundll and humm pro.

The company reported a decent improvement in interest income to $360.2 million in FY20, from $352.8 million in FY19, despite having a challenging year of operations due to the outbreak of the COVID-19 pandemic. Net income stood at $21.4 million in FY20. Notwithstanding the challenges of COVID-19, the company was able to increase the business volumes by 17% across its continuing products in FY20 and reported a cash NPAT of $29.2 million, which includes a $30.9 million provision related to the pandemic. The Group had a committed funding facility scope of $648 million, and $130 million of undrawn corporate debt facilities as on 30 June 2020. HUM’s cash position was at $157.5 million and receivables were $638.2 million during the same period end.  

FY20 Performance (Source: Company Reports)

Q1FY21 Performance Update: The company reported decent performance in the first quarter with strong volume performance in BNPL and commercial segments. The cost to income ratio was at 45%, which is a 210 bps decrease over the previous corresponding period. There was a downward trend in 30+ days arrears from the July 2020 levels, reflecting the strict approach the management has taken to credit risk and approvals. The portfolio performance has also been aided by government stimulus, mortgage deferrals and superannuation, during the quarter.

Q1FY21 Operational Performance (Source: Company Reports)

Proposed JV of HUMM with Neobank Douugh: The company has proposed a JV with Neobank Douugh to provide a Douugh branded buy now pay anywhere solution into the U.S. market in H1FY22. Through this strategic partnership, Humm will get access to the U.S. market and get a chance to bring its technologies at a global level and further disrupt the payments industry across the world. The customers of Douugh would initially be able to draw an amount up to $1000 and repay in six weekly instalments. There will be a further placement of $12 million to accelerate growth and customer acquisition post the initial phase. It includes a strategic investment of $2.5 million from Humm Ventures into Dough.

Strategic Partnership with Mastercard: HUM has recently entered into a partnership with Mastercard to expand and distribute its platform bundll globally. Under the said agreement, Mastercard will work with its partners to drive the adoption of bundll for a period of five years. The development is expected to deliver sustainable growth for Humm, expanding its services to a diversified client base.

Pricing of Asset-Backed Securities: In a recent update, the company has announced the pricing of its $250 million of asset-backed securities (ABS), which is supported by a pool of unsecured, consumer receivables under its buy now pay later offering. This is the sixth ABS transaction of the company since 2016, which also includes green notes. The company will have over $470 million of green notes issued, following the close of this transaction. The notes will be backed by solar receivables.

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 44.12% of the total shareholding. Abercrombie (Andrew J) is the largest shareholder in the company, with a percentage holding of 19.66%. Renaissance Smaller Companies Pty. Ltd. holds the second maximum interest in the company at 5.91%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During FY20, the company reported improved gross margins to 76.2% from 75.5% in FY19. However, there was a decrease in net margin to 4.5% from 12.6% in the same period. ROE was at 3.6% during FY20. HUM reported an uptick in debt to equity to 3.94x in FY20 from 3.88x in FY19. The company’s borrowings have decreased by ~4% to $2,295.1 million in FY20, from $2,387.7 million in FY19, primarily driven by a reduction in receivables and customer loans. HUM had repaid $31.4 million in corporate debt during the year. It had a comfortable cash cycle of negative 191 days during FY20.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The company operates in a highly competitive sector where capital and funding access are pre-requisites for the success of the business. Any challenge in raising capital, either through debt or equity, might impact the operations of the company in the medium to long term. HUM is also exposed to credit and anti-money laundering risks, which may arise due to a wrong credit assessment or fraudulent activities of customers. The company continues to invest in credit and fraud tools in this regard and undertakes a detailed understanding of its customers and their borrowing trends in the past. HUM operates in a highly regulated industry and hence has to maintain and satisfy all the compliance-related matters for the smooth functioning of the business. It also has to keep a continuous track of the broader macroeconomic cycle and identify larger shifts in the economy or retail environment, in order to keep its business very relevant in accordance with the latest consumer trends.

Outlook: HUM reported a decent rise in interest income in FY20, despite having a difficult year in operations due to the outbreak of the COVID-19 pandemic. The company's objective is to provide tailored financial solutions and be flexible to consumer buying patterns. It made a cost savings of over $10 million in FY20 and plans to further reduce operating expenses in FY21. The online sales from its platform humm saw a growth of 172% in FY20, reflecting increased traction of consumer purchases across online platforms. HUM expects this trend to accelerate further in the near term, with the impact of the COVID-19 pandemic on physical shopping activities. The company expects to provide improved H1FY21 cash NPAT from $34.5 million in H1FY20, owing to improved credit performance and cost management. The Group is focused on expanding its operations at a global level and is pursuing strategies to enter international markets during H2FY21. HUM has the potential to gain market share across different geographies, given the expected addressable market opportunity of over $1.2 trillion.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Humm offers interest-free instalments in different verticals across health, solar, retail etc. and is one of the leading players in BNPL transactions greater than $1000. HUM gave a negative return of 2.67% in the past three months and a negative return of 1.35% in the past one month. The stock of HUM is currently trading below its average 52-weeks’ trading range of $0.368-$2.114. On a technical front, the stock of HUM has a support level of $0.907 and a resistance level of $1.352. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). Considering the current trading levels and upside in valuation, improvement in interest income, continued focus on business expansion, increased traction in online volumes and portfolio of quality applications & platforms, we recommend a ‘Buy’ rating on the stock at the current market price of $1.09, down by 1.802% as on January 18, 2021.

HUM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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