Company Overview: humm group limited (ASX: HUM) is a diversified financial company. Its suite of products includes consumer revolving finance and cards, BNPL products, interest-free finance, to name a few. It operates through a network of over 78,100 retailers and brokers, and has its operations spread out in Australia, New Zealand and Ireland. The company has rebranded its name from FlexiGroup Limited to humm group limited in November 2020, following approval from the shareholders.

HUM Details

Investments in Products and International Expansion to Drive Bottom-Line: humm group limited (ASX: HUM) provides BNPL category of products and other financing services to its customers. The market capitalisation of the company as on 19 April 2021, stood at ~$495.26 million. As per a recent update, the company has announced that it has been accredited as one of the founding members of the BNPL industry body, Australian Finance Industry Association’s BNPL Code of Practice.

The COVID-19 pandemic has demonstrated the use of BNPL as an effective budgeting tool, and the company expects to build on its platform products with the increased traction of demand among the consumers.  

During H1FY21, the company reported a gross income of $225.2 million and a gross profit of $174.3 million. There has been a marginal decline in gross profit due to a reduction in gross income, however it was offset by savings of $7 million in interest expense. Impairment losses on customer’s loans were down by 35.2% compared to the prior corresponding period. The cash NPAT grew by 25.8% to $43.4 million and the Group reported a 15.9% rise in statutory NPAT to $38.6 million during the period. HUM has reported a decent increase of over 40% in total customers to 2.62 million as of December 2020, compared to the prior corresponding period, along with an improved trend in other key metrics performance.

H1FY21 Financial Performance (Source: Company Reports)

Investments in BNPL to Aid in Future Growth: humm reported a cash NPAT of $3.1 million from the BNPL business segment in H1FY21, reflecting a decline from the prior period owing to investments in new products which includes bundll and humm New Zealand. It witnessed an increase in volume by 13.8% to $473 million during the period, reflected by decent performance in humm Ireland, humm ‘Little things’ and the contribution from bundll. There has been increased traction in online volume due to a shift in online spending as a result of the pandemic. The 30+ days arrears for HUM stood at 1.85% as of 31 December 2020 for humm Australia.

BNPL Performance (Source: Company Reports)

New Partnerships to Expand Market Presence: On 25 March 2021, the company has announced its partnerships across several key strategic clients in the health and wellbeing sector in Australia and New Zealand, that includes Maven Dental Group, CPAP Clinic, Aidacare, to name a few. The company has witnessed volume growth of ~38% FYTD in this vertical, reflecting an annualised run rate of $120 million. Its ability to attract customers with transactions up to $30,000 over tenures ranging from five fortnights to five years makes it a favourable player in the BNPL space. humm has now over 3,500 health and well-being locations across Australia. Through the collaboration with the new partners, the company now covers around 25% of dental chairs in Australia and over 50% of enterprise audiology.

Pricing of Asset-Backed Securities: The company has recently announced the pricing of $450 million of asset-backed securities on 17 March 2021. The ABS is supported by a pool of fully amortising, secured commercial auto and equipment finance receivables and has garnered decent investor demand. Following the transaction close HUM will have issued $700 million of ABS notes in FY21.

Top 10 Shareholders: The top 10 shareholders together form around 40.51% 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 19.66% and 5.91%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported an improvement in the gross margin performance to 77.5% in H1FY21, compared to 75.5% in the prior corresponding period. There was also an improvement in the net margin to 17.1%. ROE of HUM stood at 5.8%. during the period. The leverage position improved with debt-to-equity ratio at 2.96x in H1FY21, compared to 3.98x in the H1FY20. HUM ended the period with a cash position of $53.3 million as of 31 December 2020 and total debt of $2,198 million on the balance sheet.

Growth and Margin Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company's line of business exposes it to a variety of financial risks like credit risk, liquidity risk, currency risk and interest rate risk. It maintains cash reserves and undrawn credit facilities to mitigate the risk arising out of liquidity issues. The Group is also exposed to credit risk on all of its financial assets and has a prudent credit assessment process in place in order to minimise the risk. The company has supported its customers with short-term relief during the peak of the COVID-19 period and has limited its exposure to certain high-risk Commercial sectors.

Outlook: The company will continue to invest in its growth through the launch of new products across diverse audience segments. At present, it will look to address the new markets through bundll and hummpro. The company is well-positioned to capture the shift from revolving credit to paying over time in fixed instalments in key international markets, with launch in the United Kingdom and Canada in H2FY21. As such, it plans to make new investments in marketing, product and people during the second half in order to support expansion in the international market. The management believes that humm is more than just a budgeting tool and expects to expand its operations into other health categories with low penetration of BNPL solutions.

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

Data Source: Refinitiv, Thomson Reuters, 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 company has appointed Mr. Alistair Muir as an independent Non-Executive Director of the company on 31 March 2021. As per ASX, the stock of HUM is trading below its average 52-weeks’ levels of $0.649-$1.479. The stock of HUM gave a positive return of ~20.08% in the past one year and a negative return of ~0.50% in the past one week. On a technical analysis front, the stock of HUM has a support level of ~$0.898 and a resistance level of ~$1.339. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average EV/Sales (NTM Trading multiple), considering the decent bottom line performance and its foray into international markets. For the purpose, have taken peers such as Zip Co Limited (ASX: Z1P), Money3 Corp Limited (ASX: MNY), Openpay Group Limited (ASX: OPY), to name a few. Considering the expected upside in valuation, current trading levels, rise in cash NPAT and new partnerships with strategic players, we recommend a ‘Buy’ rating on the stock at the current market price of $0.990, down by 1.001% as on April 19, 2021.

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

Note: Investment decision 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 subject to the factors discussed above.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.