Company Reports

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.

While no-moat Humm's fiscal 2024 results exceeded expectations, we think the fundamentals haven't improved as much as the share price reaction suggests. Normalized net profit after tax of AUD 61 million fell 19% from the prior year, but was still 63% above our forecast of AUD 37 million. The beat primarily came from lower expenses, driven by cost reductions in the point-of-sale payments segment, and lower impairments, now at a five-year low of 2.1% of average receivables and loans.

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.

We believe no-moat Humm’s earnings will remain subdued in the near term, relative to the past three years. This is due to higher funding costs, increased bad debts, operating cost inflation, and competition limiting its ability to raise interest/fee charges. Despite the headwinds, we still expect earnings recovery from fiscal 2025 via growth in the less contested commercial financing space, tighter credit controls, and cost reductions. We expect normalized net profit after tax to recover to its fiscal 2021-23 average of AUD 65 million by fiscal 2027-28.

The 27% decline in no-moat Humm’s first-half fiscal 2024 normalized profit to AUD 28 million and the fall in the share price since reporting indicates market optimism regarding an earnings recovery was premature. The contraction in gross profit margins and 4% growth in operating expenses, despite cost-cutting, relative to the first half of fiscal 2023 suggests it will take time before earnings recover to around AUD 65 million, the fiscal 2021-23 average. While challenging given higher interest expenses, operating cost inflation, and competitive pressures limiting fee increases, we think it is achievable should interest rates retreat.

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.

We retain our fair value estimate for no-moat Humm at AUD 0.50 per share. We expect future earnings growth to be driven by operating cost-outs and a gradual moderation in funding costs from current highs. Revenue growth—primarily driven by transaction volume growth—and stronger credit control are also expected to provide supplementary earnings support.

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.

As foreshadowed in our note on April 2, 2020, we cease coverage on FlexiGroup. We periodically adjust our coverage as necessary based on stock outlook, client demand, and investor interest. There are several near-term headwinds, mainly the coronavirus outbreak which is likely to restrain discretionary spending, weigh on revenue growth and increase the prospects of defaults and impairments. Signs of tightening liquidity could lead to higher finance costs or an inability to obtain financing for growth. There is currently a high level of uncertainty as it implements a transformation of the business in the face of subdued retail spending growth and increasing competition in its key buy now, pay later and credit card segments.

We are placing no-moat FlexiGroup under review, with the intention to cease coverage on this security in April 2020. Coverage has been transferred to a new analyst during this period. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our fair value estimate for no-moat Flexigroup remains at AUD 1.90 per share, with company reporting in line first-half fiscal 2020 underlying net profit after tax, or UNPAT, of AUD 34.5 million. Our longer-term view of the company hasn’t changed. We continue to expect the company to suffer subdued earnings in fiscal 2020 and 2021 as it exits nonperforming products, spends more on marketing new brands, and simplifies its operating systems. But we believe the company will benefit from these investments from fiscal 2022, which drives our five-year forecast 6% CAGR in UNPAT from fiscal 2019.

A new four-year exclusive agreement with Flight Centre Travel Group drives an increase in no-moat FlexiGroup’s fair value estimate to AUD 1.90 per share, from AUD 1.75. FlexiGroup will be the exclusive provider of long-term interest free credit cards to Flight Centre’s customers under the agreement. Management expect revenue from its Australian cards segment to grow by double-digit CAGR over the four-year term of the agreement. However, given the headwinds facing credit card issuers more broadly, we are taking a more cautious approach, and forecasting revenue to grow by a CAGR of about 9%, up from our previous forecast of 7%.

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.

No-moat Flexigroup’s fair value estimate increases to AUD 1.60 per share, from AUD 1.50 primarily due to the time value of money after in line fiscal 2019 results. The company’s fiscal 2019 underlying net profit after tax, or NPAT, of AUD 76 million was at the lower end of management guidance but consistent with our forecast. However, the fiscal 2019 fully franked dividend of AUD 0.077 per share was modestly above our forecast of AUD 0.070 per share and at the higher end of the company’s dividend payout ratio of between 30% and 40% of underlying NPAT. The key takeaway from the results is the acceleration of new management’s strategy, with the proposed introduction of several new financing products. At our fair value estimate, the company trades on a fiscal 2020 P/E of 8.1 and a dividend yield of 4.8%, and screens as moderately expensive.

No-moat FlexiGroup’s fair value estimate is unchanged at AUD 1.50 per share despite a potential short-lived boost to financing volumes from recent fiscal and monetary stimulus. We think an ongoing poor macroeconomic backdrop and intensifying competition from digital financing providers will continue to be headwinds. Recent stimulus measures may assist Australian retail sales over the next few months but off a very low base, and we expect any improvements to be temporary. The most recent Australian Bureau of Statistics figures indicate Australian retail sales grew by a lacklustre 0.1% in May 2019, following a fall of 0.1% in April 2019. Retail sales have been trending lower, and on an annualised basis grew by a paltry 2.7% in May 2019, compared with 3.0% in March 2019 and 3.2% in December 2018. Along with falling consumer sentiment, we foresee a generally weak economic backdrop for FlexiGroup to grow its finance receivables.

Our fair value estimate for struggling no-moat FlexiGroup remains at AUD 1.50 per share following previously guided to disappointing first-half fiscal 2019 results. New CEO Rebecca James unveiled another strategy to simplify the business and surprised with an AUD 21.5 million placement to Tanarra Capital. A solid performance in its core Cetergy business as well as its New Zealand leasing and new Australian consumer leasing business was not enough to offset the weakness in its Australian and New Zealand cards and commercial leasing businesses. In addition to the guidance to impairment losses, another disappointing feature of the results is the company’s continuing inability to convert strong receivables growth into commensurate net income growth. At our fair value estimate, the company has a fiscal 2019 P/E of 7.6 times and a dividend yield of 4.7%, with these undemanding metrics reflecting continuing macroeconomic and regulatory headwinds.

A material downgrade to its fiscal 2019 guidance, combined with continuing macroeconomic and regulatory headwinds drive a reduction in no-moat FlexiGroup Limited’s fair value estimate to AUD 1.50 per share from AUD 2.05. While we had lowered our earnings forecasts for the company in December 2018 in the face of increasing macroeconomic and regulatory headwinds, the company’s new guidance suggests the extent of these headwinds were underestimated. The company’s new guidance is 20% lower than its previous guidance reiterated only a few months ago on Nov. 16, 2018. The company expects fiscal 2019 cash net profit after tax, or NPAT in the range AUD 76 million-AUD 80 million, from previous guidance of AUD 95 million-AUD 100 million. We now forecast cash NPAT in fiscal 2019 of AUD 76.3 million, at the lower end of its new guidance. At our fair value estimate the company has a fiscal 2019 P/E of 7.3 times and dividend yield of 4.3%. The undemanding P/E reflects the regulatory and macroeconomic risks as well as the competition facing the company.

We’ve put our coverage of no-moat FlexiGroup under review while we reassess the company’s near-term financial future and recalibrate our projections in light of continued pressure on the business. We plan to publish an updated fair value estimate within the next week.

We reduce our fair value estimate for no-moat-rated FlexiGroup to AUD 2.40 from AUD 2.60 following the fiscal 2017 result. While the result was in line with our forecast and at the bottom end of the guidance range, next year’s guidance is weaker than expected. Cash net profit after tax came in at AUD 90 million, down 4% from the prior year on a continuing operations basis. Fiscal 2018 guidance is for cash NPAT of AUD 85 million-90 million as the firm further invests in Ireland, transforms its platforms and processes, and reorients its focus on underperforming units, in particular Certegy. Fiscal 2019 is targeted to be the year of growth. We have cut our fiscal 2018 cash NPAT forecast 9% to AUD 85 million. We lower our fiscal 2019 cash NPAT forecast by 4% and assume profit returns to fiscal 2017 levels. At current levels, FlexiGroup trades at a significant discount to our downgraded fair value estimate and at an undemanding P/E of 7.7 times fiscal 2018 earnings, which more than prices in execution risks with the turnaround and growth strategy.

Our fair value estimate for no-moat-rated FlexiGroup is cut to AUD 2.60 per share from AUD 2.80 following reductions to earnings forecasts. Commentary by Thorn Group on the near-term outlook for its consumer leasing business was more subdued than we expected at its recent fiscal 2017 results. We are less confident on the outlook for FlexiGroup due to expected weaker consumer spending and confidence, a tougher competitive environment and higher loan impairments. We downgrade forecast fiscal 2017 NPAT by 2% to AUD 90 million which is 7% below the prior year and at the bottom of the AUD 90 million to AUD 93 million guidance range. At current levels, FlexiGroup trades at a significant discount to our downgraded fair value estimate, and at an undemanding P/E of 7.1 times fiscal 2017 earnings which more than prices in execution risks with the growth strategy.