What Does AA Know?, page-142

I have no insight into the thoughts of AA or the HUM board. However, I have asked the board to release theresults for the March 2023 quarter to keep the market as well informed as possible. Otherwise we will not get useful infountil the full year results in mid August.

The 1H results were affected by some huge factors including extrememargin compression- both from rapid rise in cost of funds but also pressure on grossproduct yields- partly offset by the very strong growth in Commercial. Cost cuttingwas good but still has a way to go. There was very little sign (yet) of the actions to stem losses in the BNPL/PosPPsector, as those decisions were taken late in the 1H. It’s unclear how quicklythese losses can be stemmed, but HUM’s own presentation shows that that segmentwill be still making losses, albeit lower, into FY24.

Sentiment is obviously terrible towards any consumer finance,especially anything that has the whiff of BNPL. I don’t know if it’s any worse towardHumm than the whole sector. However, Hummis profitable and its NTA is 101cents. Thus even if they decided to close thewhole business down gradually and place the books into run off, there should beenough embedded profit in the receivables already on the books that, as it was graduallyclosed, would cover (at least) the cost of staff + overheads to manage the run down. Ie even in that scenario HUM ought to be ableto maintain (at least) 101c base value. Thuseven if Humm wrote no more business, its real value should be at least double today’sshare price, in the absence of catastrophic bad debts.

Whatever the reasons for the terrible share price, I ask theboard to take action now rather than waiting until the August results. The cheapest and simplest action would be to releasea summary of results for the March quarter, to give the market a clear pictureof the rate of progress in lifting the margin squeeze, cutting costs, andreducing the big losses in UKand some domestic BNPL products. Also a positive statement that all the securitisationsare compliant and open for business would be very reassuring. Some people have suggested a buyback, but Idoubt whether that would make much difference, and it would chew up valuable capital.I have been a strong buyer at here levels. I’m confident that the full year resultswill justify a higher share price, but that is 4 months away

With the share price at 45c, Humm is clearly at risk ofgetting a lowball takeover bid, provided it was all cash. I doubt that shareholderswould be keen on a scrip bid from another co in the sector. I have no idea whether AA has the resources ordesire to make a bid himself, or with other parties. I urge investors to focuson the fundamentals rather than speculate about AA, shorting etc.: eventuallythe results will speak for themselves.

Not advice. DYOR