ChanticleerBuy now, pay later pioneer's look-at-me capital...

Chanticleer

Buy now, pay later pioneer's look-at-me capital raising

Chanticleer is Australia's pre-eminent business column.

Flexigroup, Australia’s third largest buy now, pay later player, is raising $140 million to fund its next wave of growth.

But what it really needs to raise is attention.

Research firm IBISWorld says Flexigroup, which operates in the buy now, pay later space under the Humm brand, has a 17.5 per cent market share, behind Afterpay and Zip.

Clearly, Afterpay is the clear leader in terms of active customers; it has 9.9 million at last count, compared to 2.1 million for both Flexigroup and Zip. But Flexigroup’s 20-year history in the sector – mainly as a provider of point-of-sale finance for the likes of Harvey Norman – means it actually has more active merchants than both these rivals.

The problem is, investors aren’t taking notice.

Afterpay is worth an eye-watering $25.9 billion, with its shares up 205 per cent since the start of the year.

Zip is worth $3 billion, with its shares up 114 per cent over the same period.

But Flexigroup is worth just $515 million. And the stock is down 30 per cent year-to-date.

The capital raising, and two other announcements chief executive Rebecca James made on Wednesday morning to accompany a solid set of full-year numbers, are designed to change that.

Flexigroup chief executive Rebecca James is trying to change the narrative around the stock. Graham Jepson

First, Flexigroup will rebrand as Humm, and consolidate all its products under the 18-month old brand, which is clearly resonating and helped lift customer numbers by 37 per cent in the year to June 30.

Secondly, Flexigroup will put its commercial credit business, which specialises in equipment finance, through a strategic review – corporate-speak for a likely sale. James argues the value of the business isn’t being recognised inside Flexigroup, but there’s also an argument to be made that it’s complicating the firm’s pitch as a pure-play buy now, pay later player.

And finally, there’s that $140 million capital raising, which has been backed by Flexigroup’s key shareholders, including John Wylie’s investment vehicle Tanarra Capital.

James says the raising has two key aims.

First, it will allow Flexigroup to strengthen its balance sheet further by reducing debt, although at 29 per cent, gearing has halved in in five years.

(Yes, this is a buy now, pay later firm that is actually profitable – while cash profit of $29.2 million was 62 per cent down on last year, this included a COVID-19 provision of $31 million. Although again, profitability is another distinction the market doesn’t seem to ascribe much value to.)

Secondly, the raising will allow the business to chase growth, including through stepping up market efforts and investing in strategic alliances and partnerships.

James also wants dry powder for deals that might be thrown up by the COVID-19 turmoil.

“This is about giving us optionality in terms of some opportunities that may come out of this environment,” she says.

“We will spend with discipline. We’re still the only profitable player in the market – that is important for us as a business.”

But the unspoken objective of this capital raising and rebranding is to put buy now, pay later back on the radar of investors, and make it clear that the business really does belong in the same category as Afterpay and Zip.

Humming along

James argues that the 18 months since her turnaround of the company began, Flexigroup has delivered on the promise of turning Humm into a genuine and differentiated contender in the white-hot market, with a focus on purchases above $1,000.

Buy now, pay later volumes rose 18 per cent across 2020, with the average customer using Humm nine times a year, despite its much higher transaction value than Afterpay or Zip. Growth in services sectors such as health has been particularly strong, and e-commerce. Buy now, pay later transactions surged 172 per cent across 2020 and 262 per cent in the June half.

While a provision for COVID-19 has been taken, credit metrics have held up well, with buy now, pay later 90-day arrears actually falling over the year.

Flexigroup's cost base is also as low as its been in years, with $10 million in costs taken out of the business over the last 12 months through James' simplification of Flexigroup's formerly messy structure.

James has even been able to magic-up a handy little business in Ireland, where Flexigroup’s existing leasing business has been converted into a buy now, pay later business under the Humm banner. This has given the group a platform that includes 40,000 customers (up 136 per cent on the prior year) and 832 retail partners, plus status as the only player in Ireland.

But perhaps more significantly, many of those retailers are in Britain, providing Flexigroup with the potential to enter that market.

If it does expand further internationally, James insists it will do so in a differentiated way, with that focus the big ticket end of the buy now, pay later market; average transaction size in Ireland, where Humm is particularly strong in areas such as automotive servicing, is €1,500 ($2,467).

Buy now, pay later plus good growth plus international expansion has generally equalled investor excitement. Perhaps this latest suite of moves will see Humm become the rule, rather than the exception.