Company Overview: humm group limited (ASX: HUM) is a diversified payments company with offerings in buy now pay later, revolving credit and SME finance. It has a diverse set of customer base, which includes the millennial population, young families and small and medium businesses. It helps in the facilitation of purchase of 2.7 million customers as of 13 May 2021.

HUM Details

Decent Uptick in Volumes Driven by Digital Penetration & App Launches: humm group limited (ASX: HUM) is a diversified payments company and provides BNPL, revolving credit and SME finance solutions to its clients. The market capitalisation of the company as on 21 June 2021, stood at ~$515.07 million. The company has expanded its presence in the BNPL segment into the health and wellbeing sector. It has reported an annualised run rate of $120 million in this vertical as of March 2021, reflecting the demand and need for instalment payments in the health industry.

The company is making plans to enter the markets of the UK and Canada with a focus on home and home improvement, health care, automotive, and luxury retail.

During Q3FY21, the company reported decent transaction volume in the BNPL segment at $255.3 million, reflecting an increase of over 33% on the previous corresponding period. The cards volume in the ANZ region stood at $264.8 million during the period. The commercial and leasing volume grew by 61.7% to $142.2 million on the pcp. HUM has also witnessed increased digital penetration with 303.9k app downloads in Q3FY21. It also reported the integration of 1,111 merchants during the quarter in key verticals of health, luxury, retail, home improvement and automotive.

Decent Increase in Cash Levels (Source: Analysis by Kalkine Group)

Performance by Segment: The company posted robust growth in the BNPL, Commercial and Leasing business units in Q3FY21. Volumes in the BNPL segment was driven by increased usage, with 82% of transactions made by repeat customers as of March 2021 in humm Australia. There was also an increase of 11.8% in the account keeping fees in Q3FY21 on the pcp, aided by the mix of customer and merchant revenue model. The cards volumes were down during the period due to the exposure of the company to the travel sector. Australia cards volume decreased by ~38% to $104.8 million in Q3FY21 and New Zealand cards volume was down by 16.3% to $160 million, when compared to the previous corresponding quarter. However, humm90 volumes have returned to positive with its key travel partner at the end of Q3FY21. HUM also reported impressive growth of 61.7% in Commercial and Leasing volume to $142.2 million on the pcp, on the back of transformed operations and the gain of further market share of the Australian business unit.

Q3FY21 Segment Performance (Source: Company Reports)

Launch of TAPP: On 3 June 2021, the company has announced that it has launched humm//TAPP, a digital card that enables shoppers to simply tap their digital wallet in order to make a purchase at any humm merchant in Australia. It will provide a seamless and secure payment experience for the company’s customers, and can pay back in five fortnightly instalments along with interest free feature. Merchants are expected to benefit from reduced costs, resources and time, which usually takes up to three months for other BNPL instore integration.

Top 10 Shareholders: The top 10 shareholders together form around 41.88% 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 20.06% and 5.91%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: HUM delivered decent performance during H1FY21 period with a gross margin of 77.5%, an increase from 75.5% in the previous corresponding period. There was an improvement in the net margin to 17.1%, from a level of 13.8% in H1FY20. Debt to equity improved to 2.96x in H1FY21, from a level of 3.98x in H1FY20. Total debt stood at ~$2,198 million as of 31 December 2020.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company’s line of business makes it prone to credit risk, foreign exchange risk and interest rate risk. It is also exposed to liquidity risk given that it might be unable to meet its financial obligations, including payments to customers, suppliers and other third parties. In order to mitigate the given risk, the Group maintains cash reserves and committed undrawn credit facilities to meet funding requirements.

Outlook: The company continues to take a prudent approach by monitoring the potential impact on arrears from changes to government stimulus, and believes that it is well-provisioned for the future. It plans to continue to make new investments in platforms, marketing and its people in H2FY21, as it enters the markets of the UK and Canada during the period. The decision to enter these new markets offer significant opportunities for HUM's unique offering in bigger ticket, longer-term instalment plans.

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 company has appointed Mr Tim Moulton as the Country Head of the Canadian business in order to focus on its international expansion in the region. As per ASX, the stock of HUM is trading below its average 52-weeks’ levels of $0.840-$1.465. The stock of HUM gave a positive return of ~3.09% in the past three months and a negative return of ~12.28% in the past six months. 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 that the company can trade at a slight premium to its peer average EV/Sales (NTM trading multiple), considering the decent growth in BNPL & Commercial volumes, increased digital penetration and sector reach. For this purpose, we have taken peers such as Zip Co Ltd (ASX: Z1P), WISR Ltd (ASX: WZR), Moneyme Ltd (ASX: MME), to name a few. Considering the expected upside in valuation and current trading levels, impressive performance in Q3FY21, decent increase in volumes in the BNPL and Commercial business segment, launch of TAPP and foray into the markets of UK and Canada, we recommend a ‘Buy’ rating on the stock at the current market price of $0.992, down by 4.61% (as on 21 June 2021, 01:06 PM (GMT+10), Sydney, Eastern Australia).

HUM Daily Technical Chart, Data Source: REFINITIV

Note: Purple Color Line Refers to Momentum Oscillator Relative Strength Index - RSI (14) Period

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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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