Ann: hummgroup 3Q22 business update, page-114

I agree closely with capital3157’s segmental/ bar chart valuation figures on 9 May (assuming he used $1.81 for LFS). I.e. 62c for HCF/LFS + 16c net surplus corporate cash = 78c plus the value of Commercial. Today's 72c market is about 6c below 78c “locked in” value of HCF + corporate cash, but allows NIL value for Commercial. Thanks also for posting yesterday’s AFR article. Very hard to know what AA has in mind. Of course, no announcement from HUM today about it.

HUM’s market weakness is inexplicable. The March Q 22 results for HUM were perhaps slightly disappointing re BNPL volumes slowing down (the overseas opex no surprise), but there were good results in Aus and NZ cards. Most importantly, a very good result in Commercial, continuing the very strong growth and even better bad debts charges %. I don’t share the worry of some commentary about a big surge in bad debts for Commercial as interest rates rise- Commercial is a different client base from the squeezed, marginal retail customers of HCF.

Based on the March Q numbers, I forecast $22.2m Cash NPAT for Commercial in the June 22 half, on top of $15.3.m actual in 1H. So $37.5m for FY22 and $44m for 2H annualised. I give Commercial a minimum valuation at PE 6 x $37.5m/ 495m shares = 45c per HUM share up to bullish max 10 X $44m/ 495m shares = 89 c. I’m comfortable with a 60c valuation for Commercial NOW, and higher if the actual 2H results bear this out in August.

I still believe that the LFS offer for HCF is too low, but even so there is huge embedded value in HUM, with the LFS offer for HCF underwriting HUM’s value.

There seem to me to be 3 risks re HCF sale:

1. the LFS offer is said to be “binding” but we have not been told what the conditions are in this contract (except for the standard regulatory approvals) It is disgraceful that the HUM Board is waiting 15 weeks to provide materials to shareholders; they could at least have published the HCF sale contract, or the conditions in the contract, so the market could form an opinion on the likelihood of its completion.

2. Will HCF suffer any tax leakage on the sale to LFS? My guess is no, given the big write-down it took to align with the offer value. If there is any tax charge (unlikely) that should give rise to franking credits that could be distributed to HUM shareholders

3. Now that LFS shareholders have approved the sale being mostly in LFS scrip, not cash (unfortunately), there may be a big overhang of LFS scrip (plus that of the PE owners) by HUM shareholders who want to escape and cash out. However, even if LFS fell to $1.50 in the rush to get out, that would knock only 10c off the HUM valuations above.

Of the above, the only scenario that could be seriously worrying is if the LFS sale is cancelled-which is possible but highly unlikely (until AA’s recent move!) The Board’s almost total silence over the last 4 months- despite promising to keep shareholders “fully informed” is telling, and disgraceful. I usually dismiss conspiracy theories, but the silence has been so strange that one wonders if there IS another agenda (e.g. a possible bid from AA or others for Commercial), and that the Board would rather say nothing about that than be accused of being misleading if they something said that is, ultimately, unhelpful. Who knows? As capital3157said “ Let's hope for all our sakes, that AA does not overplay hishand.”

I agree with icahn “The [upside] skew remainsvery attractive”.

This is not advice. DYOR.