Ann: Shareholders to vote on Humm Consumer Finance transaction, page-52

We recommend no-moat Humm's shareholders vote against the sale of Humm consumer finance, or HCF, to Latitude. Humm's largest shareholder and director Andrew Abercrombie, who owns 20% of the firm, is also against the sale. First pitched in January 2022, Latitude seeks to buy HCF for AUD 35 million cash plus 150 million Latitude shares (worth AUD 269 million based on its May 19 closing share price).

The deal is unfavourable for Humm shareholders. It is an attempt to buy HCF at a low point for earnings, as investments for growth are masking recovering revenue growth. Sentiment towards nonbank lenders, and buy now pay later, or BNPL, firms in particular, is also very negative. Excluding Abercrombie, all other directors endorse the sale, and together own 5.7% of Humm. Business risks concerning HCF were cited as a key reason for wanting out—centred on competition, regulation, and funding. Yes they are risks, but manageable in our view, and we anticipate a step up in HCF's NPAT growth in fiscal 2024.

Accordingly, we lower our fair value estimate for Humm by 14% to AUD 1.20 per share. We ascribe a 75% probability on HCF being sold to Latitude and a 25% chance that the sale of HCF does not proceed. If unsold, we would revert to our unchanged, standalone valuation of AUD 1.40. Assuming Abercrombie does vote against the transaction, an additional 30% of votes will be required to stop the sale of HCF to Latitude.

If HCF is sold on current terms, we estimate Humm is being valued at about 1.15 per share—well below our standalone AUD 1.40 fair value estimate. This consists of the HCF proceeds (AUD 0.61 per share at Latitude's May 19 closing price of AUD 1.79), Humm's remaining commercial business (we estimate AUD 0.38 per share), and some leftover unrestricted cash (up to AUD 0.16 per share). However, we also recognise given the recent pullback in valuation multiples for nonbank lenders and BNPL firms, not all Humm shareholders may be willing to ride out the storm.