Ann: FY24 Results Announcement, page-42

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.

We raise our fair value estimate to AUD 0.58 from AUD 0.50 after reducing our projected medium-term expense growth and impairment rate. We also remove our prior assumption for a dilutive equity raise in fiscal 2026, with Australia’s unemployment rate now expected to rise more gradually instead of sharply as we previously assumed.

Shares appear considerably overvalued, with the market likely underestimating several risks. First, further cost reductions in PosPP seem limited, especially as management still plans to expand the business, including an overseas expansion. This suggests that the recent cost cuts may not recur, and medium-term cost growth will likely return. Second, given persistent inflationary pressures and longer payback periods in Humm's aggregate loans and receivables, we still expect group bad debts to rise.

Third, core business challenges persist. Transaction volumes, which fell 3% from the prior year (or grew 6% excluding discontinued products), were financed at lower gross profit margins than in fiscal 2023. Revenue yields—interest and fees charged to users over average receivables and loans—were flat from the prior year, while funding costs increased. Most segments with higher revenue yields also saw lower volumes (excluding New Zealand Cards), while volume growth in PosPP came with lower revenue yields. This highlights competition and lack of pricing power, suggesting future volume growth will likely be at lower margins, adding pressure to an increasing cost base.