With the Latitude deal in the rubbish bin, analysts and investors are turning their attention to humm’s prospects, particularly its financial strength.
In a review of the company following the announcement last Friday that Latitude would not acquire humm’s consumer business, Morningstar said one of the big questions about humm is whether it will raise equity to avoid breaching its covenants.
Morningstar said humm’s average ratio of equity to receivables has been 27 per cent over the past five years, compared with around 17 per cent now.
The company does not disclose its loan covenants but if it is required to bring the equity-to-receivables ratio back up to historical levels it might have to raise between A$150 million and $300 million.
In that event, Morningstar has calculated humm’s fair value at 70 to 85 cents a share. If it does not have to raise capital the fair value is $1.10 a share. The stock closed at 46 cents yesterday.
Even with this uncertainty over humm’s financial strength and questions over the future of buy now pay later, Morningstar has a generally positive view of the business.
“We think humm has the necessary capabilities in funding, data, credit assessment and collection to gain its fair share of the market despite competition and regulatory risks,” it said.
“We believe it can weather its near-term challenges and its focus on profitable growth is unchanged. We believe there is sufficient differentiation in humm’s big ticket item focus to help it continue growing.”
The humm board disclosed that cash earnings for the financial year to the end of May were $17 million. Morningstar said this points to full-year 2021/22 cash earnings of $19 million, which would be 59 per cent lower than 2020/21.
Morningstar had previously forecast $28 million, so it reckons there has been deterioration in the business in recent months.
Higher funding and operating costs will hold the company back in the near term but Morningstar expects it to pare back expansion plans and operating costs. It is forecasting that cash earnings will bounce back to $74 million by 2024/25.
It believes humm’s comparative advantage in consumer finance is that it is focused on segments that are less competitive and less cyclical, such as dental, solar and veterinary.
And it said the commercial finance business had significantly outperformed expectations.