Company Overview humm group limited (ASX: HUM) offers financial solutions to its clients in the geographies of Australia, New Zealand, Ireland, and the United Kingdom. Its range of business activities encompasses – Consumer revolving finance and cards; BNPL suite of products; Commercial Lease and SME financing services. Its suite of product offerings include interest free payment products, BNPL products, leasing & vendor finance products, credit cards and related finance solutions to its consumers and businesses.

HUM Details

Decent Increase in Transactional Volumes Aided by Expansion into the International Markets: The company is focused on building financial products, which are popular among the tech-savvy masses and SME's. It helps in the facilitation of purchases for 2.7 million customers in its key geographies. It has witnessed increased traction in transaction volumes aided by key strategic partnerships.

Joint Venture Agreement with Westpac New Zealand:

HUM has entered into a JV agreement with Red Bird Ventures Limited, which is a subsidiary of Westpac New Zealand. This is in regard to make the BNPL product bundll accessible to the consumer finance market in New Zealand.

• The collaboration is the first contract for the company under its global agreement with Mastercard.
• bundll will now be available to all the people in New Zealand, with preferential benefits inclined to Westpac customers.
• bundll will leverage the Mastercard network and allow customers to BNPL at their convenience, with no minimum spend.

Brief on Latest Business Update:

The company has provided an update with respect to its financial results for the quarter ended 30 June 2021 and the FY21 period. The positive results reflect HUM’s sustainable profitability and will aid the company to funds its growth strategy.

• Increase in Transactional Volumes: The company has reported a robust increase in transaction volumes in Q4FY21 to $774.9 million, reflecting an increase of 57.3% on pcp basis.
• Growth in BNPL Segment: Transaction volume in BNPL segment increased by 7% to $304.9 million in Q4FY21, when compared to the pcp.
• Cards Business: The transaction volume in the cards business unit (Australia and New Zealand) increased by 44.3% to $287.5 million in Q4FY21, demonstrating return of spends across key categories.
• Rise in Customers: Total customers increased by 19.7% to 2.7 million as of 30 June 2021.
• Increase in Cash NPAT: Cash NPAT grew by 1% to $68.4 million in FY21, compared to the prior year.

The company reported an increase in its cash position to $53.3 million as of 31 December 2020, from a level of $14.5 million as of 30 June 2020.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Launch of BNPL Product in the UK Market: On 30 June 2021, the company has announced that it has launched its buy now pay later product humm in the United Kingdom.

• humm UK will initially leverage humm Ireland’s network of more than 1,600 retail partnerships.
• It will look to partner with merchants in the space of home improvement, health, automotive, and luxury retail verticals. The current annual spend in these segments has been estimated to be ~$200 billion.

The Group has also announced the appointment of its UK Board – Mr Stephen Kirkpatrick has been appointed as the Chairman and Non-Executive Director, whereas Ms Helene Brichet and Mr Tim Turner have been appointed as the Non-Executive Director to the Board.

Top 10 Shareholders: The top 10 shareholders together form around 41.90% 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: The company reported an improvement in the EBITDA margin to 31.2% in H1FY21, compared to 22.9% in the previous corresponding period. It reported total debt of ~$2,198 million as of 31 December 2020, which reflects the entire long-term debt.

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

Key Risks: The company is prone to the following risk factors:

• Financial Risks: The Group’s activities expose it to a variety of risks, which includes liquidity risk and market risk. It is faced with the risk of being unable to pay its financial liabilities, including payments to customers.
• Credit Risk: It is prone to the risk that a counterparty or customer may not oblige with its payment obligations, thus creating default on the payables and impacting the company’s profitability.
• Potential Exposure to Forum Finance: HUM estimates that the maximum historical exposure to Forum Finance (which is under-reported investigations), including receivables on-sold to be ~$12 million post-tax. However, the company has maintained that there is no exposure in the Group’s current line of business.

Outlook: The company is focused on executing its business strategy for international expansion, which provides significant opportunities for its bigger ticket and longer-term instalments plans. In view of the company’s foray into the UK and Canada markets, it has made investments in its platforms, marketing, and people in the given regions. Moreover, the launch of TAPP will enhance the shopping experience of customers, which might support volume growth in years to come. The company is also well-positioned to leverage the increased adoption of digital and customer-centric solutions by retailers for financing. HUM will release its FY21 results for the year ended 30 June 2021 on 19 August 2021.

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: As per a recent announcement, the company has appointed Adrian Fisk as its Chief Financial Officer on 19 July 2021. As per ASX, the stock of HUM is trading below its average 52-weeks’ levels of $0.840-$1.390. The stock of HUM gave a positive return of ~2.65% in the past three months and a negative return of ~20.57% 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 increase in transaction volumes, JV agreement for product launch into the NZ market, and increase in number of customers. For this purpose, we have taken peers such as Zip Co Ltd (ASX: Z1P), WISR Ltd (ASX: WZR), Money3 Corp Ltd (ASX: MNY), to name a few. Considering the expected upside in valuation and current trading levels, impressive increase in transaction volumes, growth in customers, increase in cash NPAT and JV agreement with Westpac, we recommend a ‘Buy’ rating on the stock at the current market price of $0.960, down by ~2.041% as on 26 July 2021.

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 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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