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Morningstar sees value in BNPL player Humm

Emma Rapaport  |  30 Jun 2021Text size  Decrease  Increase  |  
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Morningstar has reinitiated analyst coverage of Aussie buy-now, pay-later Humm Group describing it as undervalued with a revived growth outlook as it pushes into the consumer finance market.

Equity analyst Shaun Ler is upbeat on the company's restructure as it seeks to improve its product offering and grow its BNPL footprint. He believes its consumer finance operation was not getting enough attention, leading it to lag its nimbler competitors Afterpay (ASX: APT) and Zip Co (ASX: Z1P).

He adds that Humm (ASX: HUM) finances a broader range of goods than the BNPL leaders with a focus on big ticket items like solar panels, healthcare and automotives. Expansions to the UK and Canada are also priorities.

"We believe the market is not factoring in upside from its forays into the UK and Canada," Ler says.

"As with Australia, they are markets where credit cards are being displaced and Humm has relationships with retailers operating there.

"The market is also assuming no growth in transaction volume in other segments post-fiscal 2021.

"We believe Humm’s restructure will improve its appeal to customers, help stem share losses and revive earnings growth."

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Ler has set a fair value estimate of $1.35 for Humm Group making it a four-star stock.

Humm, formerly Flexigroup, is a diversified finance provider with offerings in buy now pay later, or BNPL, credit cards, and equipment finance. Unlike BNPL start-ups, it is a longstanding finance provider and possesses the funding, customer data, and credit assessment and collection expertise to do business.

It debuted on the ASX in December 2006 at $2 per share. Today it is trading at 98 cents. Trading volumes increased significantly in the initial covid period as investors jumped on the rising BNPL sector.

Price Chart v Morningstar Fair Value Estimate

Price v Fair Value

AUD | as of June 28 | Index: Morningstar Australia GR AUD
Source: Morningstar Premium

BNPL crossfire weighs on future profitability

But it's not all smooth sailing. Ler believes Humm has too many overlapping, complex products which are confusing customers.  This could limit product uptake, causing it to lag its BNPL-focused peers who have a simpler offering, he says. As such, Humm will likely need to spend more on marketing.

Long-term, Ler estimates future profits will likely sit below pre-covid 19 levels. He says the company will struggle to grow without a meaningful competitive advantage. It's main disadvantages – confusing product suite, friction with customers and no way of standing out in a crowded field.

"A focus on retailer relationships, rather than with customers, sees Humm on the back foot as the balance of power in retail has shifted from the retailer to the customer amid the structural growth of online retail and viral marketing on social media," Ler says.  

"Its products are more complex, with varying fees or interest, which we think creates some friction with customers relative to competing vanilla BNPL offerings.

"Credit risks appear higher than for banks and the BNPL focused providers. Both higher credit risk and lower asset turnover necessitate higher interest rates or fees to drive reasonable profitability--potentially increasing consumer friction and limiting repeat usage."

Humm Group's diverse product offering – Australia and New Zealand

Humm Product Offering

Source: Company websites

Turnaround story

Humm is more than half-way into a three-year restructure - simplifying and improving products and systems, growing into BNPL, streamlining finance applications and expanding its addressable market.

For its BNPL products, it’s offering flexible financing limits and repayment timeframes. Ler points out that the terms for its Bundll product - financing of up to $4,000, repayable over six fortnights – are among the most generous in the industry.

Humm’s card products have also been revamped to feature greater perks. These include interest-free periods, cashbacks or conversion to interest-free instalments. Elsewhere, its commercial and leasing finance business focuses on equipment financing, distributes its services via brokers, and competes based on regular and fast approvals.

However, complexities remain in its offering as it races to catch up to competitors Ler says:

Afterpay's ANZ BNPL users generate ~300% more TTV's than Humm's overall users (12 months to Q3FY21)

Total transaction value (TTV) ($b)


Total customers ($m)


Source: Morningstar Cash Flow Model 25 May 2021

No sustainable competitive advantage

Strong competition from banks and specialty finance providers and a lack of differentiation in the commercial leasing business are among the reasons Ler assigns the Humm a no-moat rating. He sees no traces of competitive advantage across its four business units – BNPL, Australia cards, New Zealand cards and Commercial and Leasing.

"Unlike BNPL firms that are winning the land grab with clear value propositions, Humm is a credit provider reinventing itself to keep up with competition, especially in BNPL," he says.

"Humm’s product complexity is a culprit here. A focus on retailer relationships, rather than with customers, also sees Humm on the back foot."

"While offering BNPL financing earlier than Afterpay or Zip (via Certegy and Oxipay), execution on growth was subpar given the complication in--and overlap between--Humm’s products.

Humm carries a high fair value uncertainty rating owing to the lack of earnings visibility as the company undergoes a major transformation.

Morningstar analysts ceased coverage of Flexigroup in August 2020 amid transfer to a new analyst.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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