Flexigroup’s FVE Modestly Upgraded on Humm’s Early Momentum, but Risks Remain Elevated

Strong transaction volumes at the start of fiscal 2020 from new buy now pay later, BNPL, offering humm prompts an increase in no-moat Flexigroup’s fair value estimate to AUD 1.75 per share from AUD 1.60. The early results provide some comfort that over the longer-term the company should compete effectively in the increasingly competitive Australian BNPL industry. However, difficult trading conditions and intensifying competition on all its segments is why we’re not more positive. In the next 12 to 18 months, higher operating costs and capital expenditures associated with advertising new product initiatives and consolidating platforms are also likely to weigh on underlying net profit after tax, or NPAT and cash flows respectively. Management stopped giving short-term guidance, preferring to focus on the long term. Poor visibility of earnings given difficult trading conditions of low retail sales and business investments plus costs associated with new strategic initiatives probably contributed to this decision. Nevertheless, we expect underlying NPAT to be flat to negative over the next 12 to 18 months while management incur costs in implementing its strategy and battle poor trading conditions and increasing competition.