Company Overview: humm group limited (ASX: HUM) is a diversified financial services group and has the following product suites - BNPL, credit cards and business financing products. The products are designed in a way to address the core needs of the shoppers, retailers and SME’s. It has its operations spread out in Australia, New Zealand, Ireland and the United Kingdom.

HUM Details

Decent Growth in Bottom-Line Driven by Improving Economic Outlook & Reduced Impairment Losses: The company has commenced its operations in the United Kingdom from June 2021 and expects to go live in Canada in H1FY22. In view of its international expansion strategies, it is making substantial investments in its marketing and product campaigns in order to execute its business model and expand customer reach.

Strategy Drivers:

• Look for new audiences through strategic partnerships for its innovative products.
• Focus on driving customer engagement and transaction frequency.
• Expansion into further new markets.

Look at FY21 Performance:

The company delivered a decent performance in FY21, with growth in Australia Commercial and numerous BNPL products.

• Gross income stood at $443.9 million in FY21, down by 7.3% compared to the pcp, owing to a decline in cards receivables, margin pressure and lower fee & other income.
• Net operating income was at $342.9 million, aided by lower interest expense of $15.1 million.
• Impairment losses on customer loans were substantially reduced by 59.5% to $58.7 million, compared to the pcp. This was achieved due to lower net loss of $20.1 million and a benefit of $21.6 million released from a portion of the COVID-19 overlay.
• Cash NPAT grew by 121.1% to $68.4 million in FY21.
• The customer base grew by over 20% to 2.7 million during the year.

HUM ended the year with a cash position of ~$108 million as of 30 June 2021, significantly up from the levels of ~$15 million in FY20.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Focus on Growth of flexicommercial Broker Channel:

• The company has completed its strategic review of the flexicommercial broker channel and decided to invest and grow the platform following favourable market conditions.
• Operating income increased by 50.6% to $50.5 million in FY21, compared to FY20.
• HUM is also exploring to introduce mezzanine debt into the warehouse facility, which might lead to further capital efficiency.

Capital Management:

The Board has decided not to pay any dividend during FY21 as it continues to review the overall capital management position. It will look to balance its objectives of growth and shareholder distribution going forward, given its decent profitability and cash generation abilities.

Top 10 Shareholders: The top 10 shareholders together form around 41.99% 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 20.15% 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 margin performance and reported a net margin of 13.5% in FY21, compared to 4.5% in FY20. The cash cycle stood at negative 220 days in FY21. There was an improvement in the leverage profile with debt-to-equity ratio at 3.19x in FY21, compared to 4x in FY20.

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

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

• Funding Risk: It is prone to the risk of having access to its funding requirements in order to support growth initiatives.
• Credit Risk: The company’s line of business makes it prone to credit, fraud and AML risks.
• Technology Risk: HUM is dependent on its technological platform for seamless customer experience, and any adverse impact on this front could impact the performance of the company.

Outlook: The company is in the midst of numerous growth initiatives, which comprise of international expansion, new product growth and partnerships. It has reported a reduction in COVID-19 overlays on the back of improving economic outlook. It has a total addressable market of ~$1.9 trillion globally with an opportunity to grow in the Home Improvements, Health and Automotive segments. HUM will organise an investor day on 27 October 2021 and is expected to provide a full strategic review for FY22, alongside other key information.

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 update, the director of the company Andrew Abercrombie has undergone a change of interest in the company and has acquired 200,353 shares for a total consideration of $192,997.40. As per ASX, the stock of HUM is trading below its average 52-weeks’ levels of $0.840-$1.360.   The stock of HUM gave a positive return of ~3.20% in the past one month and a negative return of ~21.86% in the past one year. 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 some discount to its peers’ average, considering the decrease in gross income, net operating income and the aforesaid risks. For the purpose of valuation, few peers like Zip Co Ltd (ASX: Z1P), WISR Ltd (ASX: WZR), MoneyMe Ltd (ASX: MME) have been considered. Considering the expected upside in valuation & current trading levels, uplift in cash NPAT, increase in cash position, decrease in impairment expense, optimistic outlook with ongoing international expansion and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.945, down by 0.53% (as on 30 August 2021, 11:04 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 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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