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Humm Group Brimming With Confidence

Australia | Oct 29 2021

This story features HUMM GROUP LIMITED. For more info SHARE ANALYSIS: HUM

Card and BNPL transactions are expected to surge as travel resumes and borders re-open thus Humm Group expects a more than doubling of volumes over the medium term

-BNPL expected to be the main driver of growth for Humm Group
-Margin pressure could be aggravated by the need to secure a base in highly competitive markets
-Exploring potential divestment of NZ commercial business


By Eva Brocklehurst

Humm Group ((HUM)) is increasingly confident that transaction volumes will improve as international and local borders reopen. Travel contributed $350m of the company's Australian card transactions annually before the pandemic hit.

Medium-term targets were disclosed in the first quarter update with Humm anticipating cash net profit of over $100m, a more than doubling of volumes and a reduction in the cost-to-income ratio to less than 40%. BNPL is expected to be the largest driver of growth supported by rebound in cards and expansion of commercial.

Macquarie believes these targets are just aspirations at this stage and the company will need to execute successfully, through both increased earnings and a higher multiple, in order to obtain material upside to the current share price.

The main disparities with the broker's forecasts appears to be in product yields, with management expecting increased interchange and customer fees will drive yield expansion in BNPL.

Yet Macquarie believes, given the competitive dynamics, this is an optimistic assumption or, alternatively, will be at the expense of growth. The broker assesses the risks stem from yield compression, a deterioration in credit quality and lack of success offshore.

The company has reiterated its focus on a blended BNPL revenue model amid a combination of consumer, merchant, affiliate and interchange fees. Australian revenues are currently split 70:30 between merchant:customer fees and Humm expects the international business will be closer to 60:40 initially and eventually move to 50:50.

UBS believes the main debate for investors is understanding the level of cost investment required in BNPL, particularly in the UK and Canada. Net profit targets were broadly in line with estimates for FY25 and the broker believes a commitment to targets should provide more comfort around the earnings visibility.

Credit Suisse expects lower BNPL volumes in FY22 and higher net losses for the short term, yet raises estimates for FY23-24 by 2-4% to reflect stronger momentum in the commercial and leasing business, and confidence in a recovery for cards.

The stock has value appeal but the broker believes margin pressure in BNPL could be aggravated by the need to secure a base in new highly competitive markets. There is also growing execution risk around international expansion.

Australian card volumes are depressed given ongoing travel restrictions yet, as many states announce their intentions to open borders, Credit Suisse is now more confident about a recovery in volumes throughout 2022. NZ card volumes were flat in the first quarter as business was affected by the recent restrictions.


The building of new technology in the UK and Canada BNPL businesses is almost complete, with Credit Suisse noting the original Certegy system in Australia will be replaced soon and cost efficiency will, therefore, increase. Management has also flagged partnerships in BNPL and a mix of licensing and loyalty program opportunities.

Credit Suisse is cautious about BNPL net losses in the short term because of the rising contribution from short duration products that are likely to face higher net losses as there is minimal customer history available to assess credit worthiness.

Rising volumes from new markets in the UK and Canada present a challenge in making credit decisions around new customers and demographics. The broker asserts this is likely to lead to higher net losses in the initial stages of these markets.


The commercial & leasing business is expected to double FY21 gross income and reach $1bn in volumes over the medium term with revenue margins of 9%. Commercial & leasing saw a second consecutive quarter of record volumes of $205m.

Sustained momentum signals success following a shift to broker originators in SME lending from vendor financing, Credit Suisse observes, as the business carves out its position in a market that is less dominated by the major banks. The broker highlights the commercial business has been driving volume growth in recent years, although New Zealand has experienced a decline.

Hence, the company is exploring a potential divestment of this business having ascertained increased interest from various parties. The division contributed $10.9m in normalised cash net profit in FY21. The commercial NZ business has a high exposure to the education and government sectors with a portfolio of mostly laptops, telecommunications and office equipment.

Macquarie finds  it hard to estimate an appropriate multiple for the NZ business, with no historical growth information. Moreover, management was not willing to disclose any information about the potential use of the proceeds, given the balance sheet is robust and there is no corporate debt.

Humm Group is confident it can fund growth and not require a future equity raising. Moreover, the historical pay-out ratio of 30-40% will return from the first half. This implies, on UBS calculations, an FY22 dividend yield of 4%.

FNArena's database has two Buy ratings and one Hold (Macquarie). The consensus target is $1.22, signalling 35.2% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.3% and 5.9%, respectively.

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